<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 26, 1999
REGISTRATION NO. 333-84083
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THREE-FIVE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 7375 86-0654102
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OF ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1600 NORTH DESERT DRIVE
TEMPE, ARIZONA 85281
(602) 389-8600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JEFFREY D. BUCHANAN
CHIEF FINANCIAL OFFICER
1600 NORTH DESERT DRIVE
TEMPE, ARIZONA 85281
(602) 389-8600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
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ROBERT S. KANT, ESQ. DENNIS C. SULLIVAN, ESQ.
JEAN E. HARRIS, ESQ. DAVID A. HUBB, ESQ.
BRIAN H. BLANEY, ESQ. ANNE H. WEST, ESQ.
ONE EAST CAMELBACK GRAY CARY WARE & FREIDENRICH LLP
PHOENIX, ARIZONA 85012-1656 400 HAMILTON AVENUE
(602) 263-2400 PALO ALTO, CALIFORNIA 94301-1825
(650) 328-6561
</TABLE>
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered in this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TO BE AGGREGATE OFFERING AGGREGATE AMOUNT OF
TITLE OF SHARES TO BE REGISTERED REGISTERED PRICE PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE(2)
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Common stock, par value $.01......... 2,645,000 $19.25 $50,916,250 $14,154.72
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
(2) A filing fee in the amount of $11,835.85 was previously paid in connection
with the filing of the Registration Statement.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED WITHOUT
NOTICE. THREE-FIVE SYSTEMS, INC. MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND THREE-
FIVE SYSTEMS, INC. IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY
JURISDICTION WHERE THE OFFER OR SALE OF THESE SECURITIES IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 26, 1999
PROSPECTUS
2,300,000 Shares
[THREE-FIVE SYSTEMS LOGO]
Common Stock
------------------------
We are offering 2,000,000 shares of common stock, and a current stockholder
is offering 300,000 shares of common stock. We will not receive any of the
proceeds from the shares sold by the selling stockholder.
Our common stock is traded on the New York Stock Exchange under the symbol
"TFS." On August 25, 1999, the last reported sales price on the New York Stock
Exchange was $19 1/4 per share.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 5.
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PER SHARE TOTAL
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Public Price........................................ $ $
Underwriting Discounts.............................. $ $
Proceeds, before expenses, to Three-Five............ $ $
Proceeds to Selling Stockholder..................... $ $
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</TABLE>
The underwriters may also purchase up to an additional 345,000 shares from
us at the public offering price, less the underwriting discounts, within 30 days
from the date of this prospectus, to cover any over-allotments.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this prospectus
is truthful or complete. It is illegal for any person to tell you otherwise.
------------------------
Needham & Company, Inc.
ING Barings
J.C. Bradford & Co.
The date of this prospectus is , 1999
<PAGE> 3
Inside front cover
Upper-left: Picture of a woman using a cellular phone
Top: (Heading) Technology, Design and Flexible, High-Volume Manufacturing To
Serve Today's Growing LCD Markets
Text beneath top heading: "We have over ten years of LCD design and
manufacturing experience. We provide display design services and LCD
manufacturing or the design, manufacturing, and integration of complete, custom
LCD display module systems. Three-Five partners with each customer to add value
at each step of the process, with fast, flexible, worldwide capability to meet
any OEM demand."
Middle: Diagram describing the mechanics of an LCD display
Text beneath LCD diagram: "Custom liquid crystal displays for cellular
communications and other established markets."
Text in center: "Our advanced research and technology center in Arizona,
supported by our core LCD business, is the cornerstone of ongoing LCD
enhancements and an incubator for commercializing innovative display
technologies of tomorrow."
Bottom: (Heading) Innovation To Meet The Demands of Tomorrow's Dynamic Markets:
Microdisplays
Text in bottom-left margin: Market-driven proprietary technologies, including
LCoS microdisplays, and LCiD and LCaD LCDs, are based on Three-Five's core
competencies in design and manufacturing. Microdisplays are tiny LCDs with high
resolution that are magnified for individual or group viewing. Our LCoS
microdisplays are being assessed by major OEM customers for applications
including audio-visual projectors, HDTV screens, computer monitors, and
virtual, full-page displays for use in cellular phones and other communications
products."
Bottom-middle: Diagram describing the mechanics of Liquid Crystal on Silicon
(LCoS) microdisplays
Text beneath LCoS diagram: "Liquid Crystal on Silicon (LCoS) is a technology
that merges the high-density resolution of silicon integrated circuits with
liquid crystal displays. LCoS combines the benefits of high performance, low
cost, and low power consumption."
Bottom-right: Picture of a woman using an LCoS microdisplay
<PAGE> 4
Inside Gatefold of Page 2
Upper-left: (Heading) Evolutionary Display Technologies
Middle: Arranged under the heading, "LCD Modules customized for today's growing
markets" are pictures of different products in which our display technology has
been incorporated. The pictures have captions superimposed on them with text
above the captions and pictures.
Left margin: (Caption) LCD Display with LED Lamp; above the caption is text that
reads, "Since our beginning in the mid-1980s, Three-Five has offered customers a
variety of information display solutions. These solutions include LCDs
integrated with LED devices and other components. Soon after our inception, we
began to drive the evolution of our display capabilities away from standard LED
products and into custom LCDs."
Left-middle: (Caption) LCD - Liquid Crystal Display; above the caption is text
that reads, "LCDs are today's predominant flat panel display technology. We
produce TN, STN, FSTN, DSTN, and color and monochrome LCDs at our automated,
high-volume manufacturing facility in Arizona, the largest of its kind in North
America."
Middle: (Caption) "LCiD(TM) - Liquid Crystal intense Display; above the caption
is text that reads, "Our LCiD(TM) was one of the first products developed by our
highly experienced research and technology team in Arizona in 1997. This display
resembles a brightly-colored LED, but offers customers the low power
requirements of an LCD combined with sunlight readability and customized colors.
We expect volume production in late 1999."
Right-middle: (Caption) LCaD(R) - Liquid Crystal active Drive; above the
caption is text that reads, "Our LCaD(R) display is based on licensed,
patented technology, further developed by our research and technology group and
announced in late 1997. It is a passive matrix display with customized drive
circuitry. Our LCaD(R) display provides multiple shades of gray and excellent
optical performance. It is well-suited for applications that require texture and
depth in the image, and is available at a lower cost than active matrix
displays."
Right: Under the heading, "Microdisplays for newly emerging markets" is text
that reads, "The most exciting technology yet to emerge from our research
laboratories is the LCoS(TM) microdisplay. Our LCoS(TM) technology has the
ability to deliver millions of pixels of information with clear resolution on a
space about the size of a thumbnail. The applications for this low-cost
technology are many and range from office projector systems to a variety of
portable communications devices. The potential for LCoS(TM) rests in future
products both in existing and emerging markets. Key future products are rear
projection computer monitors, rear and front projection digital TV, and
head-mounted displays for computers, games, and movies. Data viewers for
wireless portable information devices such as cellular phones are believed to
have the highest market potential. Other applications include head-mounted
displays for flight, flight simulation, equipment maintenance, and medical."
Under the text are pictures of devices incorporating LCoS(TM) technology with
the caption "LCoS(TM) - Liquid Crystal on Silicon" superimposed on them.
Bottom-left: (Heading) Expanding Markets; beneath the heading are sub-headings
with text. The sub-headings and text read, "Communications/Computing: mobile
radios, pagers, global positioning systems, cellular phones, cordless phones,
feature phones, remote controls, personal digital assistants; Office Automation:
mail processing equipment, data storage devices, printers, multifunction
peripherals, facsimile machines, photo-copiers, scanners, computer peripherals;
Industrial: temperature controllers, industrial ovens, portable controllers,
vehicle instrumentation, gas pumps, scales, chart recorders; Medical: patient
monitors/controls, digital assistants, diagnostic equipment, digital
thermometers/glucometers/oximeters, infusion systems; Point of Sale: test &
measurement, point-of-sale terminals, barcode scanners, transaction terminals,
electronic shelf labeling; Consumer: white goods, brown goods, audio systems,
video systems, home theater, radios; Projection: front projection - office
projection and home theater; rear projection - computer monitors,
high-definition televisions, projection televisions, display cubes; Portable:
wireless convergence products, commercial/industrial wearable computers, and
personal DVD viewers."
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read this entire prospectus carefully. All references to "we," "us,"
"our," "Three-Five," or "the Company" in this prospectus mean Three-Five
Systems, Inc. and all entities owned or controlled by Three-Five Systems, Inc.,
except where it is clear that the term means only the parent company. This
prospectus contains forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors" and elsewhere in this prospectus.
INTRODUCTION
We design and manufacture display modules for use in the end products of
original equipment manufacturers, or OEMs. We currently specialize in custom
liquid crystal display, or LCD, components and technology. We collaborate
closely with our customers in providing our design and manufacturing services.
Our LCD modules are used in cellular telephones and other wireless communication
devices as well as in office automation equipment, industrial controls, medical
equipment, and instrumentation. In addition to our traditional LCD module
business, we are pursuing the commercialization of our liquid crystal on
silicon, or LCoS(TM), microdisplays following substantial research and
development over the past two years. We market our services in North America,
Europe, and Asia through a direct technical sales force. Motorola is our largest
customer.
We believe we are well positioned to expand our custom LCD display module
business through securing new customers and increasing our business with
existing customers. Our facilities, technology, and personnel enable us to
design, develop, and manufacture, on a timely and cost-effective basis, a wide
range of innovative, distinctive, and high-quality display modules that our
customers require in their end products. Our Arizona headquarters includes the
largest high-volume LCD manufacturing line in North America and a research and
technology center dedicated to custom design engineering and development of
advanced display technology. Our new manufacturing facility in Beijing, China,
increases our capacity and complements our long-standing manufacturing facility
in Manila, the Philippines. We utilize advanced, flexible manufacturing systems
to accommodate low-volume module production runs in Arizona and high-volume,
price-sensitive module production runs in Manila and Beijing. We operate our
highly automated, high-volume LCD manufacturing line in Arizona to produce the
majority of our LCDs. We believe our three manufacturing facilities provide us
with a competitive advantage in meeting the custom LCD needs of our customers.
Our technological capabilities closely coupled with our LCD manufacturing
expertise have been essential to our ability to develop and commercialize new
proprietary LCDs. Three of our new technologies include LCiD(TM) (Liquid Crystal
intense Display), LCaD(R) (Liquid Crystal active Drive), and LCoS(TM)
microdisplays. Our proprietary LCiD technology provides a color LCD display that
can be read in sunlight while requiring less power and costing less than a
comparable, traditional LED device. Applications include radar detectors,
household appliances, and industrial control panels. Our proprietary LCaD
technology provides LCD displays that feature both text and graphic images in up
to 16 shades of gray at prices that are competitive with traditional LCDs that
lack gray scale. Applications include multi-function telephones, global
positioning systems, and point-of-sale terminals.
We are also pursuing the commercialization of our LCoS microdisplay
technology. This technology addresses market demands for high-information
content, power-efficient displays with increased functionality and smaller sizes
at relatively low costs. LCoS microdisplays are no larger than a thumbnail, but
contain all of the information appearing on a high-resolution personal computer
screen. The tiny image on an LCoS microdisplay can be projected onto a screen or
other surface for individual or group viewing or used in a portable application
and viewed through a magnifying device similar to a viewfinder. We are working
with various international OEMs on LCoS microdisplay product offerings for a
broad range of applications for anticipated introduction next year. Near-term
applications include use in office projection equipment, high-definition
televisions, and computer monitors. Longer-term applications include the use of
1
<PAGE> 6
LCoS microdisplays to provide wireless access to the Internet through cellular
telephones, pagers, and personal digital assistants, or PDAs, as well as in
wearable computing equipment.
Our strategy is to enhance our position as a major, worldwide supplier of
custom designed and manufactured displays for application in various high-growth
segments of the electronics industry. Key elements of our strategy include the
following:
- identify industries that have significant growth potential and target
leading companies in those industries;
- intensify our efforts to diversify our customer base;
- establish strong and long-lasting customer relationships that enable us
to become seamless extensions of our customers' design and manufacturing
functions through understanding customer requirements, developing
solutions to satisfy their needs, and maintaining close communications
between our technical personnel and our customers' technical personnel;
- combine domestic design and prototyping with low-cost, high-volume
production capacity through the use of advanced computer-aided design
software and advanced, efficient, and highly automated production
processes;
- incorporate statistical process control methods to ensure reliable
product performance and to reduce production variances and waste;
- emphasize continuous research and development efforts to implement new
design and manufacturing techniques, to improve the speed, efficiency,
and performance of our design and manufacturing services, and to enhance
the quality, cost-effectiveness, and value of our services; and
- emphasize the development of new display technologies to meet customers'
continual requirements for higher information content and lower costs.
We believe our strategy has enabled us to provide our customers with displays
that have competitive advantages in terms of size, cost, and product
differentiation.
We maintain our principal executive offices at 1600 North Desert Drive,
Tempe, Arizona 85281, and our telephone number is (602) 389-8600. Our Web site
is located at www.threefive.com. Information contained on our Web site does not
constitute part of this prospectus.
2
<PAGE> 7
THE OFFERING
Except as otherwise indicated, all information in this prospectus reflects
a 2-for-1 stock split of the common stock effected as a dividend in May 1994 and
assumes no exercise of the underwriters' over-allotment option.
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Common stock offered by Three-Five................... 2,000,000 shares
Common stock offered by the selling stockholder...... 300,000 shares
Common stock to be outstanding after this offering... 9,017,836 shares
Use of proceeds...................................... To repay the outstanding balance of $17.1
million on our credit facility, and to
provide additional working capital.
New York Stock Exchange symbol....................... TFS
</TABLE>
The total number of shares that we assume will be outstanding after the
offering excludes (a) 249,522 shares of common stock issuable upon exercise of
stock options outstanding as of June 30, 1999, with a weighted average exercise
price of $12.00 per share, (b) 660,504 shares of common stock reserved for
future issuance under our stock option plans, and (c) 70,000 shares issuable
upon exercise of outstanding warrants, with an exercise price of $16.94 per
share.
3
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
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<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................. $85,477 $91,585 $60,713 $84,642 $95,047 $41,161 $54,644
------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of sales........................ 59,409 70,481 58,321 64,760 76,149 30,782 45,294
Selling, general, and
administrative..................... 4,867 5,386 5,351 6,557 7,334 3,434 4,942
Research and technology.............. 1,270 2,396 4,065 5,106 7,159 3,593 3,829
------- ------- ------- ------- ------- ------- -------
65,546 78,263 67,737 76,423 90,642 37,809 54,065
------- ------- ------- ------- ------- ------- -------
Operating income (loss)................... 19,931 13,322 (7,024) 8,219 4,405 3,352 579
Other income (expense), net............... 724 643 273 358 (42) 299 (399)
------- ------- ------- ------- ------- ------- -------
Income (loss) before provision for
(benefit from) income taxes............. 20,655 13,965 (6,751) 8,577 4,363 3,651 180
Provision for (benefit from) income
taxes................................... 8,109 5,548 (2,920) 3,334 1,773 1,533 (218)
------- ------- ------- ------- ------- ------- -------
Net income (loss)......................... $12,546 $ 8,417 $(3,831) $ 5,243 $ 2,590 $ 2,118 $ 398
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per common share:
Basic................................ $ 1.88 $ 1.09 $ (0.49) $ 0.67 $ 0.34 $ 0.27 $ 0.06
======= ======= ======= ======= ======= ======= =======
Diluted.............................. $ 1.59 $ 1.04 $ (0.49) $ 0.65 $ 0.33 $ 0.26 $ 0.06
======= ======= ======= ======= ======= ======= =======
Weighted average number of common shares:
Basic................................ 6,666 7,716 7,768 7,854 7,639 7,913 7,015
======= ======= ======= ======= ======= ======= =======
Diluted.............................. 7,890 8,084 7,768 8,090 7,802 8,141 7,120
======= ======= ======= ======= ======= ======= =======
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JUNE 30, 1999
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AS
ACTUAL ADJUSTED(1)
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CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................. $21,972 $ 51,360
Total assets................................................ 89,583 112,510
Notes payable to banks and long-term debt................... 13,095 --
Total stockholders' equity.................................. 51,600 87,622
</TABLE>
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(1) Adjusted to reflect the sale of the 2,000,000 shares of common stock offered
by us in this offering at an assumed public offering price of $19.25 per
share and after deducting the estimated underwriting discounts and offering
expenses and giving effect to the application of the net proceeds. See "Use
of Proceeds" and "Capitalization."
------------------------
LCaD(R) and the triangle logo are registered trademarks of Three-Five, and
LCid(TM), LCoS(TM), LCoS(TM) stylized and THREE-FIVE and the triangle logo are
trademarks of Three-Five. This prospectus also includes trademarks, service
marks, and trade names of other companies.
4
<PAGE> 9
RISK FACTORS
Before you invest in our common stock, you should be aware that there are
risks, including those set forth below. You should carefully consider these risk
factors, together with all the other information included in this prospectus,
before you decide to purchase shares of our common stock.
MOTOROLA ACCOUNTS FOR A SIGNIFICANT PORTION OF OUR SALES.
Our business depends to a significant extent on Motorola's success in the
cellular telephone business, particularly in the various major cellular
telephone programs in which we participate. Any material delay, cancellation, or
reduction of orders from Motorola could have a material adverse effect on our
business.
Motorola has been our largest customer during each of the last five years.
Sales to Motorola accounted for approximately 80.8% of our net sales in the
first six months of 1999, 63.6% in 1998, 34.6% in 1997, 65.1% in 1996, 80.5% in
1995, and 84.1% in 1994. Throughout this period, substantially all of our sales
to Motorola were for cellular telephone applications.
We anticipate that sales to Motorola in 1999 will exceed 1998 levels and
that the percentage of our net sales attributable to Motorola may increase in
1999 as a result of increasing sales to Motorola and delays in several programs
for other customers. Sales to Motorola currently are made through seven buyers
operating in seven separate plants. We currently have ongoing approximately 12
families of product programs for Motorola. During the first six months of 1999,
the five largest of these product programs accounted for a total of 73.7% of our
net sales, with the largest program accounting for 31.9% of our net sales.
During 1998, the five largest of these product programs accounted for a total of
46.0% of our net sales, with the largest program accounting for 14.6% of our net
sales.
A decline in sales to Motorola could occur at any time. For example, an
unexpected reduction in Motorola cellular telephone programs reduced our net
sales to Motorola from $73.7 million in 1995 to $39.5 million in 1996 and $29.2
million in 1997. Since Motorola has no long-term contractual commitments to
purchase any of our products, we could experience similar declines in our net
sales in the future.
WE ARE SUBJECT TO LENGTHY DEVELOPMENT PERIODS AND PRODUCT ACCEPTANCE CYCLES.
We sell our display modules to OEMs, which then incorporate them into the
products they sell. OEMs make the determination during their product development
programs whether to incorporate our display modules or pursue other
alternatives. This requires us to make significant investments of time and
capital in the custom design of display modules well before our customers
introduce their products incorporating these displays and before we can be sure
that we will generate any significant sales to our customers or even recover our
investment. During a customer's entire product development process, we face the
risk that our display will fail to meet our customer's technical, performance,
or cost requirements or will be replaced by a competitive product or alternative
technological solution. Even if we complete our design process in a manner
satisfactory to our customer, the customer may delay or terminate its product
development efforts. The occurrence of any of these events would adversely
affect our operating results.
WE DO NOT HAVE LONG-TERM PURCHASE COMMITMENTS FROM OUR CUSTOMERS.
Our customers, including Motorola, generally do not provide us with firm,
long-term volume purchase commitments. Although we have begun to enter into more
manufacturing contracts with our customers, these contracts clarify order lead
times, inventory risk allocation, and similar matters rather than provide firm,
long-term volume purchase commitments. As a result, customers can cancel
purchase commitments or reduce or delay orders at any time. The cancellation,
delay, or reduction of customer commitments could result in our holding excess
and obsolete inventory or having unabsorbed manufacturing overhead. The large
percentage of our sales to customers in the electronics industry, which is
subject to severe competitive pressures, rapid technological change, and product
obsolescence, increases our inventory and overhead risks.
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<PAGE> 10
Our operating results have been materially and adversely affected in the
past as a result of the failure to obtain anticipated orders and deferrals or
cancellations of purchase commitments because of changes in customer
requirements. For example, we made two announcements in 1998 that sales would
not meet our expectations because of delays in customer programs.
WE DEPEND ON THE MARKET ACCEPTANCE OF THE PRODUCTS OF OUR CUSTOMERS.
We do not sell any products to end users. Instead, we design and
manufacture various product solutions that our customers incorporate into their
products. As a result, our success depends almost entirely upon the widespread
market acceptance of our customers' products. Any significant slowdown in the
demand for our customers' products would adversely affect our business.
Because our success depends on the widespread market acceptance of our
customers' products, we must identify industries that have significant growth
potential and establish relationships with OEMs in those industries. Our failure
to identify potential growth opportunities or establish relationships with OEMs
in those industries would adversely affect our business.
Our dependence on the success of the products of our customers exposes us
to a variety of risks, including the following:
- our ability to provide significant design and manufacturing services for
customers on a timely and cost-effective basis;
- our success in maintaining customer satisfaction with our design and
manufacturing services;
- our ability to match our design and manufacturing capacity with customer
demand and to maintain satisfactory delivery schedules;
- customer order patterns, changes in order mix, and the level and timing
of orders placed by customers that we can complete in a quarter; and
- the cyclical nature of the industries and markets we serve.
Our failure to address these risks may cause our sales to decline.
WE FACE INTENSE COMPETITION.
We serve intensely competitive industries that are characterized by price
erosion, rapid technological change, and competition from major domestic and
international companies. This intense competition could result in pricing
pressures, lower sales, reduced margins, and lower market share. Many of our
competitors have greater market recognition, larger customer bases, and
substantially greater financial, technical, marketing, distribution, and other
resources than we possess. As a result, they may be able to introduce new
products and respond to customer requirements more quickly than we can.
Our competitive position could suffer if one or more of our customers
decide to design and manufacture their own display modules, to use standard
devices, to contract with our competitors, or to use alternative technologies.
In addition, our customers typically develop a second source, even for displays
we design for them. These second source suppliers may win an increasing share of
a program, particularly as it grows and matures, by competing primarily on price
rather than on design capability.
Our ability to compete successfully depends on a number of factors, both
within and outside our control. These factors include the following:
- our success in designing and manufacturing new product solutions,
including those implementing new technologies;
- our ability to address the needs of customers;
- the quality, performance, reliability, features, ease of use, pricing,
and diversity of our product solutions;
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<PAGE> 11
- foreign currency fluctuations, which may cause a foreign competitor's
products to be priced significantly lower than our product solutions;
- the quality of our customer services;
- our efficiency of production;
- the rate at which customers incorporate our product solutions into their
own products; and
- product or technology introductions by our competitors.
SHORTAGES OF COMPONENTS AND MATERIALS MAY DELAY OR REDUCE OUR SALES AND INCREASE
OUR COSTS.
Our inability to obtain sufficient quantities of components and other
materials necessary to produce our displays could result in reduced or delayed
sales or lost orders. Any delay in or loss of sales could adversely impact our
operating results. We obtain many of the materials we use in the manufacture of
our displays from a limited number of foreign suppliers, particularly suppliers
located in Asia, and we do not have long-term supply contracts with any of them.
As a result, we are subject to economic instability and currency fluctuations in
these Asian countries as well as to increased costs, supply interruptions, and
difficulties in obtaining materials. Our customers also may encounter
difficulties or increased costs in obtaining from others the materials necessary
to produce their products into which our product solutions are incorporated.
Materials and components for some of our major programs from time to time
have been subject to allocation because of shortages of these materials and
components. During 1998, we occasionally delayed sales of our LCD modules as a
result of the unavailability of LCD polarizers and drivers. During the first
half of 1999, we experienced difficulties obtaining our requirements for
application specific integrated circuits as a result of a worldwide shortage.
These shortages resulted in lost sales opportunities. Similar shortages in the
future could have a material adverse effect on our business.
WE MUST MAINTAIN SATISFACTORY MANUFACTURING YIELDS AND CAPACITY.
Our inability to maintain high levels of productivity or satisfactory
delivery schedules at our manufacturing facilities in Manila, Beijing, or
Arizona would adversely affect our operating results. The design and manufacture
of LCDs and display modules are highly complex processes that are sensitive to a
wide variety of factors, including the level of contaminants in the
manufacturing environment, impurities in the materials used, and the performance
of personnel and equipment. As is typical in the industry, at times we have
experienced lower than anticipated manufacturing yields and lengthening of
delivery schedules. We may encounter lower manufacturing yields and longer
delivery schedules as we continue to ramp up our high-volume LCD line to greater
production levels and begin to manufacture LCoS microdisplays. In addition, the
complexity of manufacturing processes will increase along with increases in the
sophistication of display modules.
Manufacturing yields may decrease and delivery schedules may lengthen as we
increase our manufacturing output in our new Beijing facility. Other companies
have experienced difficulty in expanding or relocating manufacturing output and
capacity, resulting in reduced manufacturing yields or delays in product
deliveries. We could experience similar manufacturing yield or delivery
problems. Any of these problems could adversely affect our operating results.
OUR EMERGING MICRODISPLAY BUSINESS MAY NOT BE SUCCESSFUL.
Our emerging microdisplay business, from which we expect to derive
substantial revenue, faces many uncertainties. If we fail to successfully
address these uncertainties, and our microdisplay business is not successful,
our sales may not grow at the rate we anticipate.
7
<PAGE> 12
Manufacturing an LCoS microdisplay involves a significantly different
procedure than manufacturing a typical liquid crystal display. Although we added
additional equipment to our Arizona LCD manufacturing line in 1998 to enhance
our ability to manufacture LCoS microdisplays, the manufacture of microdisplays
will require us to overcome numerous challenges, including the following:
- the use of a new material, silicon;
- the modification of equipment and processes to accommodate the miniature
size of the product;
- the implementation of new manufacturing techniques;
- the incorporation of new handling procedures;
- the maintenance of cleaner manufacturing environments; and
- the ability to master tighter tolerances in the manufacturing process.
We could experience significant problems in commencing volume production of
LCoS microdisplays. These problems could result in the delay of the full
implementation of high-volume LCoS microdisplay production. In addition, lower
than expected manufacturing yields could significantly and adversely affect us
because of the relatively high cost of the silicon backplanes used in LCoS
microdisplays.
Various target markets for our microdisplays, including projectors,
monitors, high-definition televisions, and portable microdisplays, are
uncertain, may be slow to develop, or could utilize competing technologies. Many
manufacturers have well-established positions in the projector and monitor
markets. As a result, we must provide these manufacturers with lower cost,
comparable performance microdisplays for their products. High-definition
television has only recently become available to consumers, and widespread
market acceptance is uncertain. Penetrating this market will require us to offer
lower cost alternatives to existing technology. In addition, the commercial
success of the portable microdisplay market is uncertain. Gaining acceptance in
this market may prove difficult because of the radically different approach of
microdisplays to the presentation of information. The failure of any of these
target markets to develop as we expect, or our failure to penetrate these
markets, will impede our anticipated sales growth. Even if our technology
successfully meets our price and performance goals, our customers may not
achieve commercial success in selling their products that incorporate our
microdisplay technology.
OUR BUSINESS DEPENDS ON NEW PRODUCTS AND TECHNOLOGIES.
We operate in rapidly changing industries. Technological advances, the
introduction of new products, and new design and manufacturing techniques could
adversely affect our business unless we are able to adapt to the changing
conditions. As a result, we will be required to expend substantial funds for and
commit significant resources to
- continue research and development activities on existing and potential
product solutions;
- engage additional engineering and other technical personnel; and
- purchase advanced design, production, and test equipment.
Our future operating results will depend to a significant extent on our
ability to continue to provide new product solutions that compare favorably on
the basis of time to introduction, cost, and performance with the design and
manufacturing capabilities of OEMs and competitive third-party suppliers. Our
success in attracting new customers and developing new business depends on
various factors, including the following:
- utilization of advances in technology;
- innovative development of new solutions for customer products;
- efficient and cost-effective services; and
- timely completion of the design and manufacture of new product solutions.
8
<PAGE> 13
OUR EFFORTS TO DEVELOP NEW TECHNOLOGIES MAY NOT RESULT IN COMMERCIAL SUCCESS.
Our research and development efforts with respect to new technologies may
not result in customer or widespread market acceptance. Some or all of those
technologies may not successfully make the transition from the research and
development lab to cost-effective production as a result of technology problems,
competitive cost issues, yield problems, and other factors. Even when we
successfully complete a research and development effort with respect to a
particular technology, our customers may determine not to introduce or may
terminate products utilizing the technology for a variety of reasons, including
the following:
- difficulties with other suppliers of components for the products;
- superior technologies developed by our competitors;
- price considerations;
- lack of anticipated or actual market demand for the products; and
- unfavorable comparisons with products introduced by others.
The nature of our business requires us to make capital expenditures and
investments for new technologies. For example, our capital expenditures for LCoS
microdisplays, currently our largest research and development effort, have been
approximately $1.6 million to date. To facilitate the development of our LCoS
microdisplay products, we also made an equity investment of $3.3 million in
inViso, Inc., formerly Siliscape, Inc., during 1998 and purchased assets and
technology of the former Light Valve business unit of National Semiconductor
Corporation for approximately $3.6 million during 1999. We may be required to
make similar investments and acquisitions in the future to maintain or enhance
our ability to offer technological solutions.
Significant expenditures relating to one or more new technologies,
especially LCoS microdisplays, that ultimately prove to be unsuccessful for any
reason could have a material adverse effect on us. In addition, any investments
or acquisitions, such as inViso and the assets and technology of the former
Light Valve business unit, made to enhance our technologies may prove to be
unsuccessful.
WE FACE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
Our manufacturing operations in Manila, Beijing, and Arizona and our sales
and distribution operations in Europe create a number of logistical and
communications challenges. These international operations also expose us to
various economic, political, and other risks including the following:
- management of a multi-national organization;
- compliance with local laws and regulatory requirements as well as changes
in those laws and requirements;
- employment and severance issues;
- overlap of tax issues;
- tariffs and duties;
- possible employee turnover or labor unrest;
- lack of developed infrastructure;
- the burdens and costs of compliance with a variety of foreign laws; and
- political or economic instability in certain parts of the world.
Changes in policies by the United States or foreign governments resulting
in, among other things, increased duties, higher taxation, currency conversion
limitations, restrictions on the transfer or repatriation of funds, limitations
on imports or exports, or the expropriation of private enterprises also could
have a
9
<PAGE> 14
material adverse effect on us. Any actions by our host countries to reverse
policies that encourage foreign investment or foreign trade also could adversely
affect our operating results. In addition, U.S. trade policies, such as "most
favored nation" status and trade preferences for certain Asian nations, could
affect the attractiveness of our services to our U.S. customers.
WE DEPEND ON OUR MANUFACTURING OPERATIONS IN THE PHILIPPINES.
Any disruption or termination of our manufacturing operations in Manila or
air transportation with the Philippines, even for a relatively short period of
time, would adversely affect our operations. The Philippines have been subject
to volcanic eruptions, typhoons, and substantial civil disturbances, including
attempted military coups against the government, since we commenced operations
at the facility in 1986. We have made cumulative capital investments in the
Philippines amounting to approximately $13.0 million through June 30, 1999. We
believe that our manufacturing operations in Manila constitute one of our most
important resources and that it would be difficult to replace the low-cost,
high-performance facility or the highly trained production staff in the event of
the disruption or termination of our manufacturing operations in Manila.
Our operations in Manila also depend on the business and financial
condition of the third-party subcontractor that owns the manufacturing facility,
which is located on land the subcontractor leases from the Philippine
government. The subcontractor operates the facility utilizing equipment,
processes, and documentation that we own and supervisory personnel that we
employ. The subcontractor provides us with direct production personnel and
leases space to us. The subcontractor also utilizes additional space in the
facility to produce products for other entities unrelated to us. The failure of
the subcontractor to fulfill its obligations to us would adversely affect our
operating results. Our agreements with the subcontractor extend through December
31, 2000 and are renewable from year to year thereafter, but may be terminated
by the subcontractor upon 180 days written notice.
OUR NEW OPERATIONS IN CHINA ARE UNPROVEN.
We commenced manufacturing operations in Beijing, China, during 1998. We
recently completed the construction of a high-volume LCD module manufacturing
facility in Beijing, which is similar to our Manila facility. We face all of the
risks inherent in constructing, equipping, and commencing operations in a new
facility. A failure of our Beijing facility to operate as we expect could
adversely affect our operating results.
We have made cumulative capital investments in China amounting to
approximately $9.1 million through June 30, 1999. Our operations and assets are
subject to significant political, economic, legal and other uncertainties in
China. The Chinese government recently has been pursuing economic reform
policies, including the encouragement of foreign trade and investment and
greater economic decentralization. The Chinese government, however, may not
continue to pursue these policies, may not successfully pursue these policies,
or may significantly alter these policies from time to time. China currently
does not have a comprehensive and highly developed system of laws, particularly
with respect to foreign investment activities and foreign trade. Enforcement of
existing and future laws and contracts is uncertain, and implementation and
interpretation of laws may be inconsistent. As the Chinese legal system
develops, the passage of new laws, changes in existing laws, and the preemption
of local regulations by national laws may adversely affect us. We also could be
adversely affected by a number of other factors, including the following:
- the imposition of austerity measures intended to reduce inflation;
- inadequate development or maintenance of infrastructure, including the
unavailability of adequate power and water supplies, transportation, raw
materials, and parts; and
- a deterioration of the general political, economic, or social environment
in China.
In addition, the U.S. government has granted China "most favored nation"
status under which the United States imposes the lowest applicable tariffs on
Chinese exports to the United States. The United
10
<PAGE> 15
States could determine not to renew China's most favored nation status in future
years. The failure or refusal of the U.S. government to renew this status could
adversely affect us by increasing the cost to U.S. customers of products
manufactured by us in China.
WE FACE RISKS ASSOCIATED WITH INTERNATIONAL TRADE AND CURRENCY EXCHANGE.
Political and economic conditions abroad may adversely affect the foreign
manufacture and sale of our displays. Protectionist trade legislation in either
the United States or foreign countries, such as a change in the current tariff
structures, export or import compliance laws, or other trade policies, could
adversely affect our ability to manufacture or sell displays in foreign markets
and to purchase materials or equipment from foreign suppliers.
While we transact business predominantly in U.S. dollars and bill and
collect most of our sales in U.S. dollars, we collect a portion of our revenue
in non-U.S. currencies, such as the Chinese renminbi. In the future, customers
increasingly may make payments in non-U.S. currencies, such as the newly created
Euro. In addition, we account for a portion of our costs, such as payroll, rent,
and indirect operating costs, in non-U.S. currencies, including Philippine
pesos, British pounds sterling, and Chinese renminbi.
Fluctuations in foreign currency exchange rates could affect our cost of
goods and operating margins and could result in exchange losses. In addition,
currency devaluation can result in a loss to us if we hold deposits of that
currency. The Philippine peso suffered a major devaluation in late 1997, and the
Chinese renminbi has experienced significant devaluation against most major
currencies over the last five years. Hedging foreign currencies can be
difficult, especially if the currency is not freely traded. We cannot predict
the impact of future exchange rate fluctuations on our operating results.
The risks described above are particularly important since international
sales represented approximately 68.0% of our net sales in the first six months
of 1999 and approximately 41.8% of our net sales in 1998. Sales in foreign
markets, primarily Europe and China, to OEMs based in the United States
accounted for almost all of our international sales in both of these periods. In
the future, we expect sales to OEMs based in Europe and China to increase.
VARIABILITY OF CUSTOMER REQUIREMENTS MAY ADVERSELY AFFECT OUR OPERATING RESULTS.
Custom manufacturers for OEMs must provide increasingly rapid product
turnaround and respond to ever-shorter lead times. A variety of conditions, both
specific to individual customers and generally affecting the demand for their
products, may cause customers to cancel, reduce, or delay orders. Cancellations,
reductions, or delays by a significant customer or by a group of customers could
adversely affect our business. On occasion, customers require rapid increases in
production, which can strain our resources and reduce our margins. Although we
have increased our manufacturing capacity, we may lack sufficient capacity at
any given time to meet our customers' demands if their demands exceed
anticipated levels.
OUR OPERATING RESULTS HAVE SIGNIFICANT FLUCTUATIONS.
In addition to the variability resulting from the short-term nature of our
customers' commitments, other factors contribute to significant periodic and
seasonal quarterly fluctuations in our results of operations. These factors
include the following:
- the timing of orders;
- the volume of orders relative to our capacity;
- product introductions and market acceptance of new products or new
generations of products;
- evolution in the life cycles of customers' products;
- timing of expenditures in anticipation of future orders;
- effectiveness in managing manufacturing processes;
11
<PAGE> 16
- changes in cost and availability of labor and components;
- product mix;
- pricing and availability of competitive products and services; and
- changes or anticipated changes in economic conditions.
Accordingly, you should not rely on the results of any past periods as an
indication of our future performance. It is likely that in some future period,
our operating results may be below expectations of public market analysts or
investors. If this occurs, our stock price may drop.
WE MUST EFFECTIVELY UTILIZE OUR ARIZONA FACILITY.
The effective utilization of our Arizona facility and its high-volume LCD
manufacturing line is critical to our success. We utilize the high-volume line
to produce a majority of our own requirements for LCDs.
The successful utilization of the LCD manufacturing line requires us to (1)
produce LCDs on a timely and cost-effective basis at quality levels at least
equal to product available from independent suppliers and (2) utilize the LCDs
we produce in devices we design and manufacture in a manner satisfactory to our
customers. We experienced some delays in fully implementing our LCD
manufacturing operations in 1996. We could experience problems or delays in the
future in conducting our LCD manufacturing operations. Any problems with our LCD
manufacturing operations could result in the lengthening of our delivery
schedules, reductions in the quality or performance of our design and
manufacturing services, and reduced customer satisfaction. These problems also
could require us to purchase our LCD requirements from third parties and could
delay our ability to recover our substantial expenditures in constructing and
equipping the high-volume LCD manufacturing line.
WE MUST EFFECTIVELY MANAGE OUR GROWTH.
The failure to manage our growth effectively could adversely affect our
operations. We have increased the number of our manufacturing and design
programs and plan to expand further the number and diversity of our programs in
the future. Our ability to manage our planned growth effectively will require us
to:
- enhance our operational, financial, and management systems;
- expand our facilities and equipment; and
- successfully hire, train, and motivate additional employees, including
the technical personnel necessary to operate our new production facility
in Beijing.
As we expand and diversify our product and customer base, we may be
required to further increase our overhead and selling expenses. We also may be
required to increase staffing and other expenses as well as our expenditures on
capital equipment and leasehold improvements in order to meet the anticipated
demand of our customers. Customers, however, generally do not commit to firm
production schedules for more than a short time in advance. Any increase in
expenditures in anticipation of future orders that do not materialize would
adversely affect our profitability. For example, prior to the receipt of orders,
we substantially increased our manufacturing capacity in 1998 by starting up
manufacturing operations in Beijing. Customers also may require rapid increases
in design and production services that place an excessive short-term burden on
our resources.
WE DEPEND ON KEY PERSONNEL.
Our development and operations depend substantially on the efforts and
abilities of our senior management and technical personnel. The recent
appointment of a new chief executive officer and the anticipated appointment of
a new chief technology officer will require the integration of management
personnel, the realignment of management duties, and the confirmation of
strategic initiatives.
12
<PAGE> 17
The competition for qualified management and technical personnel is
intense. The loss of services of one or more of our key employees or the
inability to add key personnel, including those required for our LCD
manufacturing facility, could have a material adverse effect on us. Although we
maintain non-competition and nondisclosure covenants with certain key personnel,
we do not have any fixed-term agreements with, or key person life insurance
covering, any officer or employee.
WE MUST PROTECT OUR INTELLECTUAL PROPERTY.
We believe that our continued success depends in part on protecting our
proprietary technology. Third parties could claim that we are infringing their
patents or other intellectual property rights. In the event that a third party
alleges that we are infringing its rights, we may not be able to obtain licenses
on commercially reasonable terms from the third party, if at all, or the third
party may commence litigation against us. The failure to obtain necessary
licenses or other rights or the institution of litigation arising out of such
claims could materially and adversely affect us.
We rely on a combination of patent, trade secret, and trademark laws,
confidentiality procedures, and contractual provisions to protect our
intellectual property. We seek to protect certain of our technology under trade
secret laws, which afford only limited protection. We face risks associated with
our intellectual property, including the following:
- pending patent applications may not be issued;
- intellectual property laws may not protect our intellectual property
rights;
- third parties may challenge, invalidate, or circumvent any patent issued
to us;
- rights granted under patents issued to us may not provide competitive
advantages to us;
- unauthorized parties may attempt to obtain and use information that we
regard as proprietary despite our efforts to protect our proprietary
rights;
- others may independently develop similar technology or design around any
patents issued to us; and
- effective protection of intellectual property rights may be limited or
unavailable in some foreign countries, such as China, in which we
operate.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
The market price of our common stock has been extremely volatile. Our stock
price increased dramatically during the three-year period ended December 31,
1994, but declined significantly during 1995 and 1996. The stock price increased
again during 1997, but declined significantly in 1998. Our stock price again
increased during the first half of 1999. The trading price of our common stock
in the future could continue to be subject to wide fluctuations in response to
various factors, including the following:
- quarterly variations in our operating results;
- actual or anticipated announcements of technical innovations or new
product developments by us or our competitors;
- changes in analysts' estimates of our financial performance;
- general conditions in the electronics industry; and
- worldwide economic and financial conditions.
In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market prices for many
high-technology companies and that often have been unrelated to the operating
performance of these companies. These broad market fluctuations and other
factors may adversely affect the market price of our common stock.
13
<PAGE> 18
THE ELECTRONICS INDUSTRY IS CYCLICAL.
The electronics industry has experienced significant economic downturns at
various times, characterized by diminished product demand, accelerated erosion
of average selling prices, and production over-capacity. In addition, the
electronics industry is cyclical in nature. We have sought to reduce our
exposure to industry downturns and cyclicality by providing design and
production services for leading companies in rapidly expanding segments of the
electronics industry. We may, however, experience substantial period-to-period
fluctuations in future operating results because of general industry conditions
or events occurring in the general economy.
WE MUST FINANCE THE GROWTH OF OUR BUSINESS AND THE DEVELOPMENT OF NEW PRODUCTS.
To remain competitive, we must continue to make significant investments in
research and development, equipment, and facilities. As a result of the increase
in fixed costs and operating expenses related to these capital expenditures, our
failure to increase sufficiently our net sales to offset these increased costs
would adversely affect our operating results.
From time to time, we may seek additional equity or debt financing to
provide for the capital expenditures required to maintain or expand our design
and production facilities and equipment. We cannot predict the timing or amount
of any such capital requirements at this time. If such financing is not
available on satisfactory terms, we may be unable to expand our business or to
develop new business at the rate desired and our operating results may suffer.
Debt financing increases expenses and must be repaid regardless of operating
results. Equity financing could result in additional dilution to existing
stockholders.
WE ARE SUBJECT TO ENVIRONMENTAL REGULATIONS.
Our operations result in the creation of small amounts of hazardous waste,
including various epoxies, gases, inks, solvents, and other wastes. Any failure
by us to control the use, or adequately restrict the discharge, of hazardous
substances could subject us to future liabilities. We are subject to federal,
state, and local governmental regulations related to the use, storage,
discharge, and disposal of toxic, volatile, or otherwise hazardous chemicals
used in our design and manufacturing processes. The amount of hazardous waste
produced by us may increase in the future depending on changes in our
operations. Our failure to comply with present or future environmental
regulations could result in the imposition of fines, suspension of production,
or a cessation of operations. Compliance with these regulations could require us
to acquire costly equipment or to incur other significant expenses.
CHANGE IN CONTROL PROVISIONS MAY ADVERSELY AFFECT EXISTING STOCKHOLDERS.
Our restated certificate of incorporation and the Delaware General
Corporation Law contain provisions that may have the effect of making more
difficult or delaying attempts by others to obtain control of our company, even
when these attempts may be in the best interests of stockholders. Our restated
certificate also authorizes the board of directors, without stockholder
approval, to issue one or more series of preferred stock, which could have
voting and conversion rights that adversely affect or dilute the voting power of
the holders of common stock. Delaware law also imposes conditions on certain
business combination transactions with "interested stockholders."
WE FACE RISKS ASSOCIATED WITH "YEAR 2000" COMPLIANCE.
Many existing computer programs and databases use only two digits to
identify a year in the date field. For example, 99 would represent 1999. These
programs and databases were designed and developed without considering the
impact of the upcoming millennium. Consequently, date sensitive computer
programs may interpret the date "00" as 1900 rather than 2000. If not corrected,
many computer systems could fail or create erroneous results in 2000. Failure in
our systems, or in the systems of our vendors or customers, could cause
significant adverse effects to us.
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<PAGE> 19
SALES OF LARGE NUMBERS OF SHARES COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON
STOCK.
All of our outstanding shares are freely tradeable without restriction or
further registration. Affiliates must sell all shares they own in compliance
with the volume and other requirements of Rule 144, except for the holding
period requirements. Our directors and executive officers and the selling
stockholder have agreed that for a period of 90 days after the date of this
prospectus, they will not directly or indirectly sell any shares of common stock
without the consent of Needham & Company. Sales of substantial amounts of common
stock by our stockholders, or even the potential for such sales, may have a
depressive effect on the market price of our common stock and could impair our
ability to raise capital through the sale of our equity securities.
WE DO NOT PAY CASH DIVIDENDS.
We have never paid any cash dividends on our common stock and do not
anticipate that we will pay cash dividends in the near term. Instead, we intend
to apply earnings to the expansion and development of our business.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information contained in this prospectus concerning
our future, proposed, and anticipated activities; certain trends with respect to
our revenue, operating results, capital resources, and liquidity or with respect
to the markets in which we compete or the electronics industry in general; and
other statements contained in this prospectus regarding matters that are not
historical facts are forward-looking statements, as such term is defined under
applicable securities laws. Forward-looking statements, by their very nature,
include risks and uncertainties, many of which are beyond our control.
Accordingly, actual results may differ, perhaps materially, from those expressed
in or implied by such forward-looking statements. Factors that could cause
actual results to differ materially include those discussed under "Risk
Factors."
USE OF PROCEEDS
The net proceeds to us from the sale of our common stock are estimated to
be approximately $36.0 million, assuming a public offering price of $19.25 per
share, after deducting the estimated underwriting discounts and offering
expenses. We plan to use the net proceeds to retire approximately $8.1 million
borrowed under our secured credit facility to finance our stock repurchase
program and $9.0 million borrowed in connection with recent acquisitions and
working capital loans. The credit facility consists of a $15.0 million revolving
line of credit, which matures in May 2000 and is available for general corporate
purposes, and a $10.0 million term loan facility, which matures in August 2004
and is available for our stock repurchase program. Advances under the credit
facility may be made as prime rate advances, which accrue interest payable
monthly at the bank's prime lending rate, or as LIBOR rate advances, which bear
interest at 175 basis points in excess of the LIBOR base rate for the general
facility and 237.5 basis points in excess of the LIBOR base rate for the
repurchase facility. We do not expect to renew the $10.0 million term loan
portion of the facility. The balance of the net proceeds will be available for
working capital and general corporate purposes, including continued development
of our LCoS microdisplay technology and products and strategic acquisitions of
businesses or technologies complementary to our business. We do not have any
material commitments to make any strategic acquisitions at this time. Prior to
using the net proceeds, we plan to invest the net proceeds in short-term,
interest bearing, investment grade securities.
We will not receive any of the proceeds from the shares sold by the selling
stockholder. We have agreed to pay the expenses, other than underwriting
discounts, relating to the sale of these shares.
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<PAGE> 20
PRICE RANGE OF COMMON STOCK
Our common stock has been listed on the New York Stock Exchange under the
symbol "TFS" since December 29, 1994. The following table sets forth the
quarterly high and low closing prices of our common stock as reported on the New
York Stock Exchange for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1997:
First Quarter.......................................... $16 1/4 $12 1/4
Second Quarter......................................... 16 11 5/8
Third Quarter.......................................... 26 7/8 14 1/4
Fourth Quarter......................................... 26 7/8 16 1/4
1998:
First Quarter.......................................... $23 1/16 $17 3/4
Second Quarter......................................... 20 3/8 14 7/8
Third Quarter.......................................... 18 3/16 7 1/16
Fourth Quarter......................................... 13 7/8 6 1/2
1999:
First Quarter.......................................... $16 $ 8 5/8
Second Quarter......................................... 13 13/16 8 1/16
Third Quarter (Through August 25, 1999)................ 19 1/4 13 11/16
</TABLE>
As of June 30, 1999, there were approximately 1,100 holders of record and
approximately 6,100 beneficial owners of our common stock. The closing sale
price of our common stock on the New York Stock Exchange on August 25, 1999 was
$19.25 per share.
DIVIDEND POLICY
Our policy is to retain earnings to provide funds for the operation and
expansion of our business. We have not paid cash dividends on our common stock
and do not anticipate that we will do so in the foreseeable future. Furthermore,
our $25.0 million credit facility with Imperial Bank and the National Bank of
Canada does not permit the payment of dividends without the consent of the
lenders. The payment of dividends in the future will depend on our growth,
profitability, financial condition, and other factors that our board of
directors may deem relevant.
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<PAGE> 21
CAPITALIZATION
The following table sets forth our short-term debt and capitalization at
June 30, 1999 and as adjusted to reflect the sale of the 2,000,000 shares of
common stock offered by us in this offering at an assumed public offering price
of $19.25 per share, after deducting the estimated underwriting discounts and
offering expenses that we will pay and giving effect to our receipt and
application of the net proceeds:
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Notes payable............................................. $ 5,000 $ --
Current portion of long-term debt......................... 1,461 --
------- -------
Total short-term debt.................................. $ 6,461 $ --
======= =======
Long-term debt:
Long-term debt, less current portion...................... $ 6,634 $ --
------- -------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; issued and outstanding: none............... -- --
Common stock, $.01 par value; 15,000,000 shares
authorized; 7,983,606 issued and 7,017,836 outstanding,
actual; 9,017,836 issued and outstanding, as
adjusted(1)............................................ 80 90
Additional paid-in capital................................ 32,545 60,275
Retained earnings......................................... 27,247 27,247
Cumulative translation adjustment......................... 10 10
Treasury stock, at cost (965,770 shares, actual; -0-, as
adjusted).............................................. (8,282) --
------- -------
Total stockholders' equity............................. 51,600 87,622
------- -------
Total capitalization.............................. $58,234 $87,622
======= =======
</TABLE>
- ------------
(1) Excludes the following:
- 249,522 shares issuable upon exercise of options outstanding at June 30,
1999 under our stock option plans, with a weighted average exercise price
of $12.00 per share;
- 660,504 shares available for future issuance under our stock plans; and
- 70,000 shares issuable upon exercise of outstanding warrants with an
exercise price of $16.94.
For a discussion of benefit plans, see Note 4 to the Consolidated Financial
Statements.
17
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table contains selected consolidated financial data and is
qualified by the more detailed Consolidated Financial Statements and Notes
thereto included elsewhere in this prospectus. The consolidated statement of
operations data for the fiscal years ended December 31, 1996, December 31, 1997,
and December 31, 1998 have been derived from our Consolidated Financial
Statements, which statements have been audited by Arthur Andersen LLP,
independent public accountants, and are included elsewhere in this prospectus.
The consolidated statement of operations data for the fiscal years ended
December 31, 1994 and December 31, 1995 have been derived from our consolidated
financial statements, which have been audited by Arthur Andersen LLP but which
are not included in this prospectus. Data as of June 30, 1999 and for the six
months ended June 30, 1998 and 1999 have been derived from our unaudited
Consolidated Financial Statements included elsewhere in this prospectus and, in
our opinion, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of operations for
the periods presented. Results for the six months ended June 30, 1999 are not
necessarily indicative of the results to be expected for the full year. This
data should be read in conjunction with the Consolidated Financial Statements
and Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................. $85,477 $91,585 $60,713 $84,642 $95,047 $41,161 $54,644
------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of sales........................... 59,409 70,481 58,321 64,760 76,149 30,782 45,294
Selling, general, and administrative.... 4,867 5,386 5,351 6,557 7,334 3,434 4,942
Research and technology................. 1,270 2,396 4,065 5,106 7,159 3,593 3,829
------- ------- ------- ------- ------- ------- -------
65,546 78,263 67,737 76,423 90,642 37,809 54,065
------- ------- ------- ------- ------- ------- -------
Operating income (loss)................... 19,931 13,322 (7,024) 8,219 4,405 3,352 579
Other income (expense), net............... 724 643 273 358 (42) 299 (399)
------- ------- ------- ------- ------- ------- -------
Income (loss) before provision for
(benefit from) income taxes............. 20,655 13,965 (6,751) 8,577 4,363 3,651 180
Provision for (benefit from) income
taxes................................... 8,109 5,548 (2,920) 3,334 1,773 1,533 (218)
------- ------- ------- ------- ------- ------- -------
Net income (loss)......................... $12,546 $ 8,417 $(3,831) $ 5,243 $ 2,590 $ 2,118 $ 398
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per common share:
Basic................................... $ 1.88 $ 1.09 $ (0.49) $ 0.67 $ 0.34 $ 0.27 $ 0.06
======= ======= ======= ======= ======= ======= =======
Diluted................................. $ 1.59 $ 1.04 $ (0.49) $ 0.65 $ 0.33 $ 0.26 $ 0.06
======= ======= ======= ======= ======= ======= =======
Weighted average number of common shares:
Basic................................... 6,666 7,716 7,768 7,854 7,639 7,913 7,015
======= ======= ======= ======= ======= ======= =======
Diluted................................. 7,890 8,084 7,768 8,090 7,802 8,141 7,120
======= ======= ======= ======= ======= ======= =======
</TABLE>
18
<PAGE> 23
<TABLE>
<CAPTION>
JUNE 30, 1999
---------------------
AS
ACTUAL ADJUSTED(1)
------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................. $21,972 $ 51,360
Total assets................................................ 89,583 112,510
Notes payable to banks and long-term debt................... 13,095 --
Total stockholders' equity.................................. 51,600 87,622
</TABLE>
- -------------------------
(1) Adjusted to reflect the sale of the 2,000,000 shares of common stock offered
by us in this offering at an assumed public offering price of $19.25 per
share, after deducting the estimated underwriting discounts and offering
expenses and giving effect to the application of the net proceeds. See "Use
of Proceeds" and "Capitalization."
19
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We offer advanced design and manufacturing services to original equipment
manufacturers, commonly referred to as OEMs. We specialize in custom display
modules utilizing liquid crystal display, or LCD, components and technology. Our
LCD modules have varying levels of integration. At a minimum, each module
includes an LCD, a custom LCD driver, and a flexible connector. We also provide
value-added services, which increase our profit margins, by assembling
additional components onto the module based upon the specific needs of the
customer. These additional components include such items as key pads, plastics,
speakers, light guides, and optics.
We currently sell substantially all of our LCD modules to major OEMs. When
we win a design program, our customer typically pays most or all of our
nonrecurring engineering expenses to defray the costs of custom design, as well
as the costs of nonrecurring tooling for custom components. The typical program
life cycle of a custom-designed LCD module is three to twelve months and
includes technical design, prototyping, pilot manufacturing, and high-volume
manufacturing. We typically seek large volume programs from major OEMs. The
minimum production quantity for an LCD module typically approximates 100,000
units per year, although the production rate for some programs has been as high
as 100,000 units per week. The selling price of our LCD modules usually ranges
between $5 and $20 per unit. We recognize revenue upon product shipment.
We experienced substantial growth from 1993 through 1995, primarily as a
result of sales to OEMs in the wireless communications industry, which grew
substantially during that period. During that period, our primary customer was
Motorola. In 1996, our net sales declined, primarily as a result of the
phase-out by Motorola of a significant family of programs. In 1997, our net
sales returned to pre-1996 levels primarily as a result of several new programs
and customers, including Hewlett-Packard. Motorola accounted for 65.1% of our
net sales in 1996, 34.6% in 1997, and 63.6% in 1998. In the first half of 1999,
net sales to Motorola increased at a rate faster than net sales to our other
customers and represented 80.8% of our net sales. Hewlett-Packard accounted for
32.0% of our net sales in 1997, and less than 10.0% in 1998 and the first half
of 1999. This percentage decrease occurred as several older Hewlett-Packard
programs matured. In addition, new programs launched by Hewlett-Packard in 1998
either did not require our LCD modules or required less complex, lower cost
modules.
During the past several years, we have experienced seasonal quarterly
fluctuations in our net sales as our OEM customers developed retail products
with shorter product life cycles and phased out older programs early in the year
following holiday sales. As a result, sales usually peak in the fourth quarter
of a calendar year and are lower in the following quarter.
Several factors impact our gross margins, including manufacturing
efficiencies, product differentiation, product uniqueness, inventory management,
product mix, and volume pricing. Currently, significant pricing pressure exists
in the LCD module market, especially in higher volume programs in the wireless
communications industry. Accordingly, as the production levels of some of our
new higher volume programs have increased, the lower standard gross margins on
those programs have impacted our overall margins.
We vertically integrate our manufacturing facilities. In Arizona, we own
and operate the largest high-volume LCD production line in North America. We
generally use the Arizona facility for the manufacture of more technologically
complex and custom high-volume LCDs. We also purchase LCDs from Asian sources to
provide us an alternate source and to ensure available capacity. In order to
take advantage of lower labor costs, we ship our LCDs to our facilities in
Manila, the Philippines, or Beijing, China, for assembly into modules.
20
<PAGE> 25
Historically, we have conducted most of our manufacturing operations at our
facility in Manila. At that facility, we assemble LCDs into modules and perform
certain back-end LCD processing operations. We conduct our operations in Manila
under an agreement with a third-party subcontract manufacturer. Under this
agreement, the subcontractor supplies direct labor and incidental services
required to manufacture our products. We also lease our manufacturing facility
from the subcontractor. All indirect manufacturing employees, primarily
technicians, supervisors, and engineers, are our employees.
In early 1998, we decided to open a similar display module manufacturing
facility in Beijing. Within six months, we located a temporary manufacturing
facility, equipped the facility, trained our personnel, qualified the facility
for customers, and qualified products manufactured at the facility. As we began
manufacturing operations in Beijing in the second and third quarters of 1998,
however, we incurred costs in advance of the receipt of significant sales. These
incremental Beijing-based expenses were reflected in our cost of sales. We began
manufacturing in volume in Beijing in the fourth quarter of 1998. We operated
the temporary Beijing facility at approximately 80% of capacity during the
second quarter of 1999.
We commenced construction of our permanent Beijing facility in late 1998.
This facility was substantially completed in early July 1999, and we are
currently in the process of occupying this new facility. We own our Beijing
facility through a wholly-owned foreign subsidiary. We expect to begin
production in the new manufacturing facility late in the third quarter of 1999.
We believe that the gross margin contribution of our Beijing facility will
increase as additional manufacturing lines are added and fixed overhead expenses
are spread over a greater volume of sales.
Selling, general, and administrative expense consists principally of
administrative and selling costs, salaries, commissions, and benefits to
personnel and related facility costs. We make substantially all of our sales
directly to OEMs, and our sales force consists of a small number of direct
technical sales persons. As a result, there is no material cost of distribution
in our selling, general, and administrative expense. Selling, general, and
administrative expense has increased as we have expanded our business and
increased our diversification efforts. In addition, we have recently incurred
substantial marketing and administrative expenses in connection with our LCoS
microdisplay business.
Research and technology expense consists principally of salaries and
benefits to scientists, design engineers, and other technical personnel, related
facility costs, process development costs, and various expenses for projects,
including new product development. Research and technology expense continues to
increase as we develop new display products and technologies, especially LCoS
microdisplays, while we continue with our in-house process development efforts
related to the high-volume LCD manufacturing line located in Arizona.
Since 1997, we have been working on the development of LCoS microdisplays.
In 1997, we entered into a strategic alliance with National Semiconductor
Corporation for the development of LCoS microdisplay products. Under that
alliance, National focused on the silicon technologies needed for microdisplays,
and we focused on the liquid crystal technologies. National recently decided to
close its microdisplay business unit, and in connection with that closing, in
July 1999, we purchased certain assets and licensed silicon technologies from
National relating to LCoS microdisplays for approximately $3.0 million in cash
and warrants to purchase 70,000 shares of our common stock in a transaction
valued at approximately $3.6 million. No additional payments are required under
the licenses. We also hired several key technical employees of National to
assist in the implementation of the acquired technologies.
In April 1998, we entered into a strategic relationship with inViso, Inc.,
formerly Siliscape, Inc., a privately held company with numerous patents and
proprietary technology related to microdisplay development. We acquired a
minority equity interest in inViso for approximately $3.3 million. As part of
this strategic relationship, we provide proprietary manufacturing capabilities
and liquid crystal expertise, and inViso provides patented and proprietary
technologies and components for the joint development of microdisplay products.
21
<PAGE> 26
In August 1999, we licensed the microdisplay technology of S-Vision
Corporation, which recently ceased operations. This license is an irrevocable,
royalty free, fully paid-up, worldwide license to manufacture and package
certain microdisplay products and patented optical engines.
These acquisitions, investments, and licenses will result in increased
research and technology expenses as we expand our LCoS microdisplay development
efforts in preparation for the commercial introduction of LCoS microdisplay
products. We are also considering licensing other technologies from other
companies that could be optimized on our LCD manufacturing line as well as
entering into further alliances. We expect to continue to devote substantial
resources to research and development, focusing, especially in the near term, on
our LCoS microdisplay technology and related products. As a result, the actual
dollar amount of our research and technology expenses will continue to increase.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net sales of certain items in our Consolidated Financial Statements.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- --------------
1996 1997 1998 1998 1999
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Costs and expenses:
Cost of sales................................. 96.1 76.5 80.1 74.8 83.0
Selling, general, and administrative.......... 8.8 7.8 7.7 8.3 9.0
Research and technology....................... 6.7 6.0 7.6 8.8 7.0
----- ----- ----- ----- -----
111.6 90.3 95.4 91.9 99.0
----- ----- ----- ----- -----
Operating income (loss)............................ (11.6) 9.7 4.6 8.1 1.0
Other income (expense), net........................ 0.5 0.4 -- 0.7 (0.7)
----- ----- ----- ----- -----
Income (loss) before provision for (benefit from)
income taxes..................................... (11.1) 10.1 4.6 8.8 0.3
Provision for (benefit from) income taxes.......... (4.8) 3.9 1.9 3.7 (0.4)
----- ----- ----- ----- -----
Net income (loss).................................. (6.3)% 6.2% 2.7% 5.1% 0.7%
===== ===== ===== ===== =====
</TABLE>
Six months ended June 30, 1999 compared to six months ended June 30, 1998
NET SALES. Net sales increased 32.5% to $54.6 million in the six months
ended June 30, 1999 from $41.2 million in the six months ended June 30, 1998.
This increase was the result of several new programs, primarily for Motorola.
COST OF SALES. Cost of sales increased to 83.0% of net sales in the six
months ended June 30, 1999 from 74.8% in the six months ended June 30, 1998.
This percentage increase resulted primarily from significant price pressure in
the LCD module market, especially affecting higher volume programs in the
wireless communications industry. In addition, high volume programs that
generally produce lower gross margins represented a larger percentage of net
sales in the first six months of 1999, thereby reducing overall gross margin.
Our gross margin in the six months ended June 30, 1999 was also adversely
impacted by the under-utilization of our facility in Manila during the first
quarter of 1999, partly related to material shortages and allocation of
manufacturing to our new Beijing facility. Utilization of the Manila facility
improved during the second quarter of 1999. In addition, in late 1998 and early
1999, we moved the labor-intensive portion of our Arizona LCD line and certain
chip-on-glass equipment to Manila. Inefficiencies related to the start-up of the
new lines adversely affected manufacturing yields in Manila during the first
22
<PAGE> 27
quarter of 1999. However, yields improved as the facility became fully
operational in the second quarter. In addition, high fixed overhead costs
associated with our new Beijing facility adversely impacted gross margins during
the first six months of 1999. In the first six months of 1999, our operations in
Beijing produced a gross profit contribution of $349,000 on net sales of $16.4
million, corresponding to a gross margin in our Beijing facility of 2.1%.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. Selling, general, and
administrative expense increased 44.1% to $4.9 million in the six months ended
June 30, 1999 from $3.4 million in the six months ended June 30, 1998. Selling,
general, and administrative expense was 9.0% of net sales in the six months
ended June 30, 1999 compared to 8.3% in the six months ended June 30, 1998. The
increase in selling, general, and administrative expense reflected the continued
expansion of our business. In particular, in the first half of 1999, we incurred
approximately $800,000 of marketing and administrative expenditures relating to
our LCoS microdisplay business compared to approximately $100,000 in the first
six months of 1998.
RESEARCH AND TECHNOLOGY EXPENSE. Research and technology expense increased
5.6% to $3.8 million in the six months ended June 30, 1999 from $3.6 million in
the six months ended June 30, 1998. Research and technology expense was 7.0% of
net sales in the six months ended June 30, 1999 compared to 8.8% in the six
months ended June 30, 1998. Although research and technology expense associated
with in-process developments on the LCD line decreased in the first six months
of 1999, research and technology expense overall increased as the result of the
development of new display products and technologies. For example, LCoS
microdisplays accounted for approximately $1.8 million of research and
technology expense in the first six months of 1999 compared to approximately
$1.0 million in the first six months of 1998.
OTHER INCOME (EXPENSE), NET. Other expense in the six months ended June
30, 1999 was $399,000 compared to other income of $299,000 in the six months
ended June 30, 1998. The difference was a result of increased interest expense
and reduced interest income. The increase in interest expense was primarily a
result of additional borrowing incurred in connection with our stock repurchase
program and increased borrowings on our working capital line of credit. Reduced
interest income was a result of lower cash balances.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. We had a benefit from income
taxes of $218,000 in the six months ended June 30, 1999 compared to a provision
for income taxes of $1.5 million in the six months ended June 30, 1998. This
change resulted primarily from lower pre-tax income in the six months ended June
30, 1999 compared to the same period in 1998. In addition, we recorded a tax
benefit in the first quarter of 1999 relating to a state income tax refund. In
the second half of 1999, we expect our overall tax rate to be approximately
42.0%.
NET INCOME (LOSS). Net income decreased 81.0% to $398,000, or $0.06 per
diluted share, in the six months ended June 30, 1999 from $2.1 million, or $0.26
per diluted share, in the six months ended June 30, 1998. Excluding LCoS
microdisplay related expenses, our net income for the six months ended June 30,
1999 was approximately $1.9 million, or $0.27 per diluted share.
Year ended December 31, 1998 compared to year ended December 31, 1997
NET SALES. Net sales increased 12.3% to $95.0 million in 1998 from $84.6
million in 1997. The increase resulted from several new programs in 1998 for a
variety of customers, including Motorola. In 1998, we recorded 56.7% of our net
sales in the third and fourth quarters. Net sales in the fourth quarter of 1998
were almost 58.6% greater than in the first quarter of 1998.
COST OF SALES. Cost of sales increased to 80.1% of net sales in 1998 from
76.5% in 1997. The corresponding decrease in our gross margin was primarily the
result of manufacturing variances occurring as a result of the start-up of our
new manufacturing facility in Beijing, unfavorable manufacturing yields
experienced in connection with the start of several new programs, and increased
pricing pressure from customers and competitors, partially as a result of the
Asian economic crisis.
23
<PAGE> 28
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. Selling, general, and
administrative expense increased 10.6% to $7.3 million in 1998 from $6.6 million
in 1997. Selling, general, and administrative expense was 7.7% of net sales in
1998 compared to 7.8% in 1997. Selling, general, and administrative expense
increased in absolute terms as a result of increased selling expenses and the
addition of administrative personnel. As a result of increased net sales in
1998, however, selling, general, and administrative expense declined slightly as
a percent of net sales.
RESEARCH AND TECHNOLOGY EXPENSE. Research and technology expense increased
41.2% to $7.2 million in 1998 from $5.1 million in 1997. Research and technology
expense was 7.6% of net sales in 1998 compared to 6.0% in 1997. In 1998, we
continued to expand and intensify our research and development efforts on
proprietary display products as well as ongoing LCD manufacturing process
improvements, including increased use of the LCD manufacturing line in our
Arizona facility as a resource for development of these new products.
OTHER INCOME (EXPENSE), NET. Other expense was $42,000 in 1998 compared to
other income of $358,000 in 1997. Net interest income in 1998 was $75,000, down
from $548,000 in 1997. The decrease in net interest income was the result of
investing lower average cash balances during the year as well as increased
interest expense as a result of increased debt. This decline in net interest
income was partially offset by reduced foreign exchange losses.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. We recorded a provision for
income taxes of $1.8 million in 1998 compared to $3.3 million in 1997. Our
overall tax rate was 40.6% in 1998 compared to 38.9% in 1997. The increased tax
rate resulted primarily from losses in Beijing for which we did not receive a
tax benefit proportionate to our tax rate elsewhere in the world.
NET INCOME (LOSS). Net income decreased 50.0% to $2.6 million, or $0.33
per diluted share, in 1998 compared to $5.2 million, or $0.65 per diluted share,
in 1997.
Year ended December 31, 1997 compared to year ended December 31, 1996
NET SALES. Net sales increased 39.4% to $84.6 million in 1997 from $60.7
million in 1996. This increase was a result of several new programs in 1997 for
a variety of customers, including Hewlett-Packard. Increased sales to
Hewlett-Packard in 1997 more than offset a decline in sales to Motorola.
COST OF SALES. Cost of sales decreased to 76.5% of net sales in 1997
compared to 96.1% in 1996. The corresponding increase in gross margin was the
result of a number of factors, including decreased provision for excess and
obsolete inventory, decreased unfavorable manufacturing variances occurring as a
result of increased manufacturing volume, labor utilization, material purchases,
and better manufacturing yields due to a more mature product mix. Also, in the
third quarter of 1996 we took a special one-time provision for excess and
obsolete inventory related primarily to end-of-life programs for which the
majority of shipments, expected to occur in the latter part of 1996, never
materialized. Furthermore, we were required to make significant design
modifications to a new product, which also resulted in obsolete inventory.
Without the provision for excess and obsolete inventory taken in the third
quarter of 1996, cost of sales, as a percentage of net sales, would have been
84.5% in 1996.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. Selling, general, and
administrative expense increased 22.2% to $6.6 million in 1997 from $5.4 million
in 1996. Selling, general, and administrative expense was 7.8% of net sales in
1997 compared to 8.8% in 1996. Selling, general, and administrative expense
increased in absolute terms as a result of increased selling expenses and the
addition of administrative personnel. As a result of increased net sales in
1997, however, selling, general, and administrative expense declined as a
percentage of net sales.
RESEARCH AND TECHNOLOGY EXPENSE. Research and technology expense increased
24.4% to $5.1 million in 1997 from $4.1 million in 1996. Research and technology
expense was 6.0% of net sales in 1997 compared to 6.7% in 1996. Research and
technology expense increased in 1997 as we invested in new
24
<PAGE> 29
technologies and manufacturing processes, developed new potential products, and
continued process development efforts related to our high-volume LCD
manufacturing line.
OTHER INCOME (EXPENSE), NET. Other income increased 31.1% to $358,000 in
1997 from $273,000 in 1996. Net interest income was $548,000 in 1997 compared to
$412,000 in 1996. The increase in interest income was the result of investing
higher average cash balances during the year. The increase in interest income
was partially offset by increased foreign exchange losses.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. We recorded a provision for
income taxes of $3.3 million in 1997 compared to a benefit from income taxes of
$2.9 million in 1996. This resulted primarily from the net loss we recorded in
1996. Our overall tax rate was 38.9% in 1997 compared to 43.3% in 1996.
NET INCOME (LOSS). Net income was $5.2 million, or $0.65 per diluted
share, in 1997 compared to a net loss of $3.8 million, or $0.49 per share, in
1996. Without the provision for excess and obsolete inventory taken in 1996, our
net income would have been $158,000, or $0.02 per diluted share, in 1996.
25
<PAGE> 30
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited consolidated statement of operations
data for each of the 10 quarters in the period ended June 30, 1999, as well as
such data expressed as a percentage of net sales. We believe that all necessary
adjustments have been included to present fairly the quarterly information when
read in conjunction with the Consolidated Financial Statements. The operating
results for any quarter are not necessarily indicative of the results for any
subsequent quarter.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------------------
1997 1998 1999
-------------------------------------- -------------------------------------- -----------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................. $16,129 $18,737 $24,074 $25,702 $18,479 $22,682 $24,572 $29,314 $23,044 $31,600
Cost and expenses:
Cost of sales........... 12,488 14,377 18,511 19,384 13,687 17,095 22,243 23,124 20,191 25,103
Selling, general, and
administrative........ 1,466 1,479 1,822 1,790 1,619 1,815 1,721 2,179 2,449 2,493
Research and
technology............ 1,130 1,315 1,314 1,347 1,689 1,904 1,250 2,316 1,821 2,008
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
15,084 17,171 21,647 22,521 16,995 20,814 25,214 27,619 24,461 29,604
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)... 1,045 1,566 2,427 3,181 1,484 1,868 (642) 1,695 (1,417) 1,996
Other income (expense),
net..................... 145 147 111 (45) 175 124 (52) (289) (185) (214)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
provision for (benefit
from) income taxes...... 1,190 1,713 2,538 3,136 1,659 1,992 (694) 1,406 (1,602) 1,782
Provision for (benefit
from) income taxes...... 389 685 1,010 1,250 664 869 (291) 531 (960) 742
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)......... $ 801 $ 1,028 $ 1,528 $ 1,886 $ 995 $ 1,123 $ (403) $ 875 $ (642) $ 1,040
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
QUARTERS ENDED
---------------------------------------------------------------------------------------------------
1997 1998 1999
-------------------------------------- -------------------------------------- -----------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost and expenses:
Cost of sales........... 77.4 76.7 76.9 75.4 74.1 75.4 90.5 78.9 87.6 79.4
Selling, general, and
administrative........ 9.1 7.9 7.6 7.0 8.8 8.0 7.0 7.4 10.6 7.9
Research and
technology............ 7.0 7.0 5.5 5.2 9.1 8.4 5.1 7.9 7.9 6.4
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
93.5 91.6 90.0 87.6 92.0 91.8 102.6 94.2 106.1 93.7
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)... 6.5 8.4 10.0 12.4 8.0 8.2 (2.6) 5.8 (6.1) 6.3
Other income (expense),
net..................... 0.9 0.7 0.5 (0.2) 1.0 0.6 (0.2) (1.0) (0.9) (0.7)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
provision for (benefit
from) income taxes...... 7.4 9.1 10.5 12.2 9.0 8.8 (2.8) 4.8 (7.0) 5.6
Provision for (benefit
from) income taxes...... 2.4 3.6 4.2 4.9 3.6 3.8 (1.2) 1.8 (4.2) 2.3
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)......... 5.0% 5.5% 6.3% 7.3% 5.4% 5.0% (1.6)% 3.0% (2.8)% 3.3%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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Historically, we have experienced seasonal fluctuations in our net sales.
OEM customers that purchase our products for incorporation into retail products
typically increase their purchases during the year-end holiday period and phase
out old programs early in the year following holiday sales. As a result, net
sales typically peak in the fourth quarter and reach a seasonal low point in the
first quarter.
There is significant pricing pressure in higher volume programs in the
wireless communications and office automation industries. In addition,
high-volume programs that generally have lower gross margins began to represent
a larger percentage of net sales in the second half of 1998, thereby reducing
gross margin. In the third quarter of 1998, we also started several new programs
and incurred substantial start-up costs on those new programs. In the first
quarter of 1999, we had an unfavorable product mix, shipping principally lower
margin products. In addition, reduced manufacturing yields and under-absorption
of fixed overhead contributed to lower margins.
We started new manufacturing operations in Beijing in 1998. Our gross
margins in the second and third quarters of 1998 were adversely affected by
start-up costs associated with these operations, which were incurred in advance
of the receipt of significant sales.
In 1998, we continued to expand and intensify our research and development
efforts on proprietary display products, such as LCoS microdisplays, as well as
ongoing LCD manufacturing process improvements, including increased use of the
LCD manufacturing line at our Arizona facility. Research and technology expense
declined in the third quarter of 1998 as process developments on the LCD line
subsided and third-party expenditures were postponed. Other expense increased in
the last half of 1998 as our cash balances declined and we increased our
borrowings.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, we had cash and cash equivalents of $5.8 million compared
to cash and cash equivalents of $4.9 million at December 31, 1998 and $16.4
million at December 31, 1997.
During the first six months of 1999, we had $827,000 in net cash flow from
operations compared to $2.0 million in net cash outflow from operations during
the first six months of 1998. Cash flow from operations improved primarily as a
result of a smaller increase in inventories during the six months ended June 30,
1999 than during the comparable 1998 period, although this improvement was
offset by a greater increase in accounts receivable, primarily as a result of
increased sales. In addition, one of our major customers has lengthened the
payment terms to all of its vendors, including us. We anticipate that accounts
receivable will continue to increase during the balance of 1999 if net sales
increase, but we expect that inventory balances will level out as we strive to
increase inventory turns.
We had $62,000 in net cash outflow from operations during 1998 compared to
positive cash flow of $6.8 million during 1997. The decrease in cash flow from
operations was primarily due to a decrease in net income, a decrease in the
provision for inventory valuation reserves, an increase in other assets, and a
smaller increase in accounts payable and accrued liabilities than in 1997. The
increase in accounts receivable occurred primarily as a result of increased
sales activity in 1998, and the increase in inventory occurred primarily as a
result of a build-up for anticipated sales in 1999. Depreciation expense was
$4.7 million in 1998 compared to $4.1 million in 1997. This increase was
primarily a result of an increased number of starts on the LCD manufacturing
line in Arizona. The high-volume LCD line is depreciated on a units of
production method based on units started.
Our working capital was $22.0 million at June 30, 1999, down from $24.8
million at December 31, 1998 and $29.1 million at December 31, 1997. Our current
ratio at June 30, 1999 was 1.8-to-1 compared to 2.5-to-1 at December 31, 1998
and 3.1-to-1 at December 31, 1997. The reduction in our working capital and
current ratio occurred primarily because of our substantial investments in fixed
assets in Beijing, including our new facility. Including our cash, cash
equivalents, and available credit facilities, we had approximately $15.8 million
in readily available funds at June 30, 1999 compared to $21.9 million at
December 31, 1998.
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In November 1998, we entered into a new $25.0 million secured credit
facility with Imperial Bank and the National Bank of Canada. The credit facility
consists of a $15.0 million revolving line of credit that matures in 2000, which
is available for general corporate purposes, and a $10.0 million term loan
facility that matures in 2004, which provides available funds to repurchase our
common stock. At June 30, 1999, $8.1 million of borrowings were outstanding
under the term loan facility as a result of our purchase of almost one million
shares of our own common stock. Advances under the facilities may be made as
prime rate advances, which accrue interest payable monthly at the bank's prime
lending rate, or as LIBOR rate advances, which bear interest at 175 basis points
in excess of the LIBOR base rate for the general facility and 237.5 basis points
in excess of the LIBOR base rate for the repurchase facility. All outstanding
borrowings are prime rate advances.
Capital expenditures during the first half of 1999 were approximately $5.1
million compared to $4.9 million during the first half of 1998. Capital
expenditures for the first half of 1999 consisted primarily of $3.8 million for
equipment and construction costs relating to our manufacturing facility in
Beijing and $1.3 million for manufacturing and office equipment for our
operations in Manila and Arizona. We anticipate the initial facilities and
capital cost for our operations in Beijing to be approximately $10.0 to $12.0
million. We expect to incur additional capital costs as we add additional
manufacturing lines in Beijing. To date, we have expended approximately $9.1
million in Beijing for manufacturing, equipment, building construction, and land
costs.
Capital expenditures during 1998 were approximately $8.1 million compared
to $3.0 million during 1997. Capital expenditures for 1998 consisted primarily
of manufacturing and office equipment for our operations in Manila and Arizona
and laboratory equipment for research and development. In addition, we spent
$5.3 million for equipment and construction in 1998 related to our Beijing
operations.
In July 1999, we purchased certain assets and licensed silicon technologies
from National Semiconductor relating to LCoS microdisplays for approximately
$3.0 million in cash and warrants to purchase 70,000 shares of our common stock.
Substantially all of the purchase price will be allocated to depreciable assets,
tooling and mask rights, and amortizable licenses.
We believe that our existing balances of cash and cash equivalents,
anticipated cash flows from operations, the proceeds of this offering, and
available and anticipated credit lines will provide adequate sources to fund our
operations and planned expenditures through 2000. We may have to expand our loan
commitments or pursue alternate methods of financing or raising capital,
however, should we encounter additional cash requirements. For example, accounts
receivable and inventory could rise faster than anticipated if revenue levels
increase more than currently anticipated. In addition, we will continue to seek
other alliances or acquisitions and additional relationships with regard to the
strategic development of various new technologies, especially LCoS
microdisplays, that may also require us to make additional capital investments.
We cannot provide assurance that adequate additional loan commitments or
alternative methods of financing will be available or, if available, that they
will be on terms acceptable to us.
EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
The results of our operations for the periods discussed have not been
significantly affected by inflation or foreign currency fluctuations. We
generally sell our products and services and negotiate purchase orders with our
foreign suppliers in U.S. dollars. The sub-assembly agreement relating to our
operations in Manila, however, is based on a fixed conversion rate, exposing us
to exchange rate fluctuations with the Philippine peso. We have not incurred any
material exchange gains or losses to date. There has been some minor benefit as
a result of the peso devaluation, although we are now required to pay
approximately one-third of any peso devaluation gain to our lessor and direct
labor subcontractor in Manila.
We commenced operations in Beijing in 1998. Although the Chinese currency
currently is stable, its value in relation to the U.S. dollar is determined by
the Chinese government. There is general speculation
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that China may devalue its currency in response to recent devaluations by
several Asian countries as a result of East Asia's economic crisis. Devaluation
of the Chinese currency could result in translation adjustments to our balance
sheet as well as reportable losses depending on our monetary balances and
outstanding indebtedness at the time of devaluation. The government of China
historically has made it difficult to convert its local currency into foreign
currencies. Although we from time to time may enter into hedging transactions in
order to minimize our exposure to currency rate fluctuations, the Chinese
currency is not freely traded and thus is difficult to hedge. In addition, the
government of China has recently imposed restrictions on Chinese currency loans
to foreign-operated entities in China. Based on the foregoing, there can be no
assurance that fluctuations and currency exchange rates in the future will not
have an adverse effect on our operations.
YEAR 2000 COMPLIANCE DISCLOSURE
Many existing computer programs and databases use only two digits to
identify a year in the date field. For example, 99 would represent 1999. These
programs and databases were designed and developed without considering the
impact of the upcoming millennium. Consequently, date sensitive computer
programs may interpret the date "00" as 1900 rather than 2000. If not corrected,
many computer systems could fail or create erroneous results in 2000.
Our state of readiness
We have completed an assessment of all of our internal and external systems
and processes with respect to the year 2000 issue. In response to this
assessment, we have created a multi-functional year 2000 task force to resolve
any non-compliant year 2000 systems or processes. This group is currently on
schedule to complete this task during the third quarter of 1999. We plan to
continuously test all of our internal and external systems and processes,
including the associated year 2000 fixes, for year 2000 compliance during 1999.
As part of this process, we have assessed the potential impact of year 2000
failures from vendors and other companies upon our business and currently are
taking steps to minimize that risk. Based on our current state of readiness and
the actions we are currently taking, including installing backup processes and
systems, we do not believe that the year 2000 problem will have a material
adverse effect on our financial position, liquidity, or operations.
Our costs of year 2000 compliance
We estimate that our total costs of year 2000 compliance will be less than
$300,000. These costs include updating of computer software and hardware
manufacturing equipment, as well as employment and other out-of-pocket costs. To
date we have spent $224,000 for the upgrade and testing of our systems.
Risks of year 2000 issues
We procure a significant amount of raw materials used in our manufacturing
processes from foreign vendors. As a result, we may be at risk from foreign
companies and countries that are not taking adequate measures to ensure year
2000 compliance or that may not be at the same level of preparedness as
companies in the United States. For example, economic problems in Asia may
affect or divert resources with respect to the year 2000 issue. Failure of those
foreign countries and companies to be year 2000 compliant may cause material
shortages that could adversely impact our manufacturing operations. In addition,
we currently have significant manufacturing operations in Manila and Beijing. As
a result, we may be at risk with respect to suppliers of necessary resources,
such as power or water, that may not be year 2000 compliant. For example,
brownouts or blackouts may occur due to lack of year 2000 compliance. In
addition, some of our customers may experience catastrophic year 2000 failures,
including prolonged interruptions in factory production, in which case they may
have a reduced demand for our products.
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Our contingency plans
We are developing contingency plans with respect to significant year 2000
issues that are within our control. For example, we are in the process of
assessing and verifying the year 2000 compliance of our international and
domestic raw material vendors. Verification will be accomplished through the use
of written inquiries to suppliers, certifications, audits, and information
provided by suppliers on their websites. We intend to replace any vendors found
not to be year 2000 compliant with vendors that are year 2000 compliant. In the
construction of our new Beijing facility, we procured material, processes, and
equipment that are year 2000 compliant. We also are investigating the use of
stand-by generators for our plants in the event of local power failures. We are
investigating transferring our manufacturing processes to alternate
manufacturing facilities if external factors beyond our control relative to the
year 2000 issue occur and we cannot conduct manufacturing operations at any
particular facility.
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BUSINESS
INTRODUCTION
We design and manufacture display modules for use in the end products of
OEMs. We currently specialize in custom liquid crystal display, or LCD,
components and technology. We collaborate closely with our customers in
providing our design and manufacturing services. Our LCD modules are used in
cellular telephones and other wireless communication devices as well as in
office automation equipment, industrial controls, medical equipment, and
instrumentation. In addition to our traditional LCD module business, we are
pursuing the commercialization of our liquid crystal on silicon, or LCoS,
microdisplays following substantial research and development over the past two
years. We market our services in North America, Europe, and Asia through a
direct technical sales force. Motorola is our largest customer.
INDUSTRY OVERVIEW
Liquid Crystal Displays
Prior to the introduction of LCDs in the 1970s, most commonly used displays
and indicators had substantial limitations as to their use, especially in terms
of size, life, and power consumption. LCDs were developed in response to these
limitations, especially the demand for greater information content and less
power consumption than was possible using light emitting diode, or LED,
technology. LCDs, sometimes called flat panel displays, provide high information
content displays at competitive prices. LCDs now appear in products throughout
the communications, office automation, industrial, medical, and commercial
electronics industries. LCDs are one of the fastest growing of the established
display industry segments, primarily because of their widespread application in
mobile communications devices, a fast-growing segment of the electronics
industry.
An LCD modifies light that passes through or is reflected by it, rather
than emitting light like an LED. An LCD generally consists of a layer of liquid
crystalline material suspended between two glass plates. The liquid crystals
align themselves in a predictable manner when stimulated electrically. The
alignment produces a visual representation of the desired information. LCDs can
display information in black and white or in a wide range of color combinations.
LCD displays consist of a matrix of dots, called pixels, which are arranged in
rows and columns that can be selectively energized to form letters or pictures.
A principal advantage of LCDs over other display technologies, such as LEDs, is
the ability to include thousands or even millions of pixels in a single display
allowing for greater information content.
There are two types of LCDs, active matrix and passive matrix. Active
matrix LCD displays are relatively complex devices that require manufacturing
operations involving very large capital investments. Active matrix LCD displays
are used in larger, high-information content applications, such as laptop
computers. Passive matrix LCD displays are less complex and less expensive to
manufacture. Passive matrix LCD displays are used in such applications as
cellular telephones, pagers, office equipment, data collection terminals, point
of sale equipment, medical devices, transportation instrumentation, and
industrial instruments and controls.
The Custom Passive LCD Market
Stanford Resources estimates that the worldwide market for passive LCD
display modules was approximately $2.8 billion in 1998. This market includes
displays used in cellular telephones and other wireless communication devices as
well as in office automation equipment, industrial controls, medical equipment,
and instrumentation, but excludes displays for use in low-end consumer products,
such as watches and calculators, according to Stanford Resources. Of the $2.8
billion market, $1.4 billion represented LCD displays used in cellular telephone
applications. Cellular telephones are the largest and fastest growing market for
LCD modules. According to Gartner Group's Dataquest, the worldwide market for
cellular wireless handsets has grown from 18.7 million units produced in 1993 to
175.4 million units in 1998. This represents a compound annual growth rate of
56%. Dataquest projects that cellular handset
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production will exceed 550 million units per year by 2003. Additional fast
growing markets for LCD display modules include pagers, personal digital
assistants, or PDAs, and palm top computers.
The increasing complexity and functionality of handheld products, such as
wireless computing devices, require OEMs to increase the visual performance and
information content of the displays incorporated into their products. At the
same time, the market continues to demand that OEMs incorporate displays with
reduced power requirements and lower costs. Custom passive LCDs address these
requirements for high performance, increased information content, low power, and
low cost.
OEMs also seek ways to differentiate their products from the products of
their competitors. Custom-designed display modules provide OEMs a cost-effective
means to achieve this differentiation. In designing its product, an OEM must
determine whether to use standard "off-the-shelf" display modules, to design its
own custom display modules for production by a custom display manufacturer, or
to enter into arrangements with a third party for custom display design and
production. In making a decision to engage third parties for custom design and
production, OEMs recognize that standard "off-the-shelf" displays make it more
difficult to differentiate their products from those of their competitors. In
considering whether to design their own display modules, OEMs often recognize
that their greatest strengths consist of consumer brand name recognition, market
research and product development expertise, and highly developed sales and
distribution channels. Advanced design and manufacturing processes require
increasing investments for research and development, personnel, and equipment.
Competitive market conditions require a shorter period of time from product
conception to delivery, product differentiation, improved product user
friendliness, and continually enhanced product performance and reduced product
cost during the life cycle of the product. As a result of these factors and
increasingly sophisticated and complex technology, it has become more difficult
for even the leading OEMs to maintain the necessary technology, expertise,
personnel, and equipment to design and produce internally all of the various
components necessary for their products. As a result, there has been a trend
toward outsourcing the design and production of components such as display
modules.
In addition to design and production, OEMs have increased their use of
third-party suppliers to add additional components to their products. This
permits the integration of more of the manufacturing steps into fewer locations.
This trend toward integration and outsourcing decreases the number of suppliers
necessary to produce a final product and results in lower costs.
The Emerging Microdisplay Market
Market trends demand high-information, power-efficient displays with
increasing functionality and smaller sizes at relatively low costs.
Microdisplays based on liquid crystal on silicon technology provide a response
to those demands.
Liquid crystal on silicon microdisplays are a form of LCD in which liquid
crystalline material is suspended between a glass plate and a silicon backplane
rather than between two glass plates. The silicon backplane, essentially an
integrated circuit, provides drive signals for each pixel element of the display
as well as logic functions, such as serial to parallel conversion and data
storage. Because silicon integrated circuits, a highly developed technology,
form the basis of these displays, liquid crystal on silicon technology permits a
very high-information, high-performance display in a small size and at a
relatively low cost.
Microdisplays are no larger than a thumbnail, but contain all of the
information appearing on a high-resolution personal computer screen. The tiny
image on a microdisplay can be projected onto a screen or other surface for
individual or group viewing or used in a portable application that is viewed
through a magnifying device similar to a viewfinder. Various types of projector
applications represent the most common current use of microdisplays. Projectors
can cast the information on a distant large screen, as in front projectors, or
shine the image through a translucent screen, as in rear projectors. Potential
near-term microdisplay applications include use in office projection equipment,
high-definition televisions, and computer monitors. Potential longer-term
applications include use in wireless access to the Internet through cellular
telephones, pagers, and PDAs as well as in wearable computing equipment using
head-mounted displays, which allow hands-free access to large amounts of
information.
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A well-developed front projector market currently exists. These products
are typically referred to as audio-visual projectors and are generally fixed or
portable products used in business applications. Most front projectors currently
use transmissive polysilicon microdisplay technology. Reflective liquid crystal
on silicon technology, however, is expected to provide more information at a
lower cost.
Emerging market segments are beginning to develop for large,
cost-effective, higher-resolution computer monitors and television screens.
Current display technologies for computer monitors and high-definition
televisions encounter serious barriers related to cost, resolution, and
dimensions when used for high-resolution large screens. Many companies are
considering the incorporation of microdisplays into large, high-resolution
screens to enable affordable display solutions.
Significant development efforts are currently being directed to portable
microdisplays as a potential method for delivering high-information content at
low cost and with low power consumption in mobile, hand-held communications
devices. It is widely assumed that converged voice and data communications
devices have the potential to become a new class of products in mobile
communications, probably integrated with PDA functions, such as phonebooks and
calendars. In concept, the functions of the telephone, e-mail, pagers, PDAs, and
the Internet are expected to become integrated. Delivery of high-information
content over the Internet on a small, direct-view display, however, presents
difficult technological challenges. Portable microdisplays used with a
viewfinder offer a potential solution because they can deliver as much
information as a computer monitor in a very small, lightweight, and power-
efficient package.
The portable microdisplay market is just beginning to develop. Market
potential currently is uncertain and is limited by such factors as the
availability of sufficient wireless communications bandwidth, the uncertainty of
customer acceptance, and the possibility of alternative technologies.
Nevertheless, many major vendors of cellular telephones, pagers, and PDAs have
prototype programs underway to develop new converged mobile communications
products with large information content at low cost, and many of these vendors
are beginning to assess portable microdisplays for use in these products.
THE THREE-FIVE APPROACH
We seek to provide our customers with high-performance, information-rich,
low-power consumption displays that have competitive advantages in terms of
size, cost, and product differentiation. To accomplish this goal, our research
and development activities focus on technological developments intended to meet
the current and future requirements of our customers. We add value for our
customers through our ability to integrate the design and production process,
which reduces the time between product conception and market introduction. Our
emphasis on customization and technological leadership has positioned us to
develop new custom product solutions for our customers as they seek displays
with more information content at lower cost.
Our custom product solutions provide OEMs with the following benefits:
- access to specialized design and manufacturing technology and expertise;
- accelerated design process and reduced design and manufacturing costs
through the use of our specialized personnel, equipment, and facilities;
- reduced reliance on multiple suppliers for components and integration of
their production processes; and
- the ability to concentrate their own resources on the design, production,
and distribution of their core products.
By eliminating the duplication and overlap of investment and resources, we
and our OEM customers are able to work together and grow at a faster rate than
would otherwise be possible. We concentrate on the development of our display
technologies and their applications to products, while our customers devote time
and resources on market development for these products.
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Our historical target market consists of high-end monochrome passive LCD
display modules of 1/4 VGA (320 x 240 pixels) or less resolution, primarily
those having smaller than three-inch diagonal screen sizes. We do not address
low-end LCD display markets, such as watches and calculators. Our target market
for LCoS microdisplays consists of displays of SVGA (800 x 600 pixels) or higher
resolution.
STRATEGY
Our strategy is to enhance our position as a major, worldwide supplier of
custom-designed and manufactured displays for application in various high-growth
segments of the electronics industry. Key elements of our strategy include the
following:
Target Leading Customers in High-Growth Industries
We identify industries that we believe have the greatest long-term
potential for growth. We recognize that our growth and development is closely
aligned with the growth and development of the industries we serve. Current
targeted industries include cellular telephones and other wireless
communications, data collection, office automation, medical equipment, and
industrial controls.
Within an industry, we target leading companies that we believe would
benefit from our design and manufacturing services. Targeted customers typically
are Fortune 1000 manufacturing companies whose products require display devices.
Our sales and engineering staffs then attempt to demonstrate the benefits that
the potential customer would derive by outsourcing to us the design and
production of display devices required in their products.
Once we establish a relationship with a new customer, we endeavor to
develop new programs for other product groups within the customer's business.
For this reason, we specifically target customers with multiple divisions or
product lines.
Expand Customer Base
We intend to intensify our efforts to diversify our customer base. We also
plan to target specialized markets that have substantial volume requirements. We
will continue to seek opportunities in growing and emerging markets, both in the
United States and internationally.
Establish Close Relationships with Customers
We seek to establish strong and long-lasting customer relationships through
our fundamental business practice, which we refer to as "customer partnering."
Customer partnering involves aligning our prospects with those of our customers
and seeking to make our engineering and production staffs seamless extensions of
the product design and production departments of our customers. This includes
our engineers spending a significant portion of their time assisting customers
with their own research and development efforts at their facilities. In
addition, our customers' engineers spend a significant amount of time conducting
research and development in our facilities.
We stress product solutions for our customers' products. We view each
customer's new product as our own, and take pride in creating and implementing
innovative engineering solutions that differentiate the customer's product from
competitive products. In connection with this philosophy, we have positioned
ourselves to provide a rapid response to our customers and their worldwide
operations.
To achieve our customer partnering goal, we emphasize corporate cultures,
customs, and communications that complement those of our customers. A thorough
understanding of our customers' products and business goals enables us to
anticipate customer needs and to develop new design and production solutions for
their products.
We continually attempt to enhance the competitive position of our customers
by providing them with innovative, distinctive, and high-quality display devices
on a timely and cost-effective basis. To do so, we work continually to improve
our productivity, lower our costs, and speed the delivery of our product
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solutions. We endeavor to streamline the entire design through delivery process
by maintaining an ongoing engineering and manufacturing improvement effort.
We continue to provide customer support after product design has been
completed and production has been commenced. Through such follow-on activity, we
conduct quality enhancement and cost-reduction efforts to maintain the
competitiveness of our customers' products.
Provide Advanced Custom Design and Manufacturing Services
We seek to design, prototype, and manufacture, on a timely and
cost-effective basis, a wide range of innovative, distinctive, and high-quality
display devices for operational control and information display functions
required in the end products of OEMs. Our design processes utilize advanced
computer-aided design software to provide custom solutions for customers'
products in time frames and on cost bases that we believe are substantially
shorter and lower priced than industry norms.
We utilize flexible manufacturing systems that can accommodate low-volume
product runs in Arizona and high-volume, price-sensitive runs in Manila and
Beijing. Our LCD facility in Arizona allows us to supply a majority of our LCD
requirements. Production in Manila and Beijing, with advanced, efficient, and
highly automated manufacturing processes utilizing state-of-the-art
manufacturing and test equipment provides us with low-cost, high-volume
production capacity. We anticipate that our ability to design, prototype, and
manufacture product solutions will be enhanced by the expansion of our
engineering personnel, our increased design capacity, and our ability to meet
our LCD requirements. We continue to increase our production personnel and add
sophisticated manufacturing equipment to meet expanding capacity requirements.
We will continue to explore the most advanced and cost-efficient production
methods for each product solution.
Leverage Research and Technology
We continually strive to develop and acquire new technologies that provide
practical solutions for our customers. We conduct an active research and
development program that
- continually improves our products and creates new products,
- increases our efficiency,
- reduces our costs,
- improves the speed, efficiency, and performance of our design and
manufacturing processes,
- develops new design and manufacturing processes and techniques,
- enhances the quality, cost-effectiveness, and value of our services, and
- utilizes new technological developments.
We plan to expand our research and development efforts through increased
expenditures and the hiring of additional personnel to meet the expectations of
our customers and to satisfy our goal to design and produce the most advanced
product solutions on a timely and cost-effective basis. We currently are
exploring the development and expansion of existing LCD technologies as well as
new technologies, such as active addressing, sunlight readable LCDs, color LCDs,
plastic LCDs, bi-stable LCDs, graphics and color graphics, organic and polymer
light emitting displays, and pixel-related display technologies. New
technologies also include our LCoS microdisplays, which address the increased
demands for high-information displays in a small size and at a relatively low
cost.
PRODUCTS AND SERVICES
We currently engage in the design and manufacture of LCD display modules
and the development and commercialization of manufacturing technologies for use
in various products of OEMs.
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LCD Display Modules and Services
We currently emphasize custom designed LCD display modules. A manufacturer
of a complete system or product requiring a specific type of visual display,
such as a cellular telephone, medical instrument, business machine, or hand-held
data collection device, represents a typical buyer for a custom LCD display
module. For each custom display module, we work directly with our customer to
develop and produce the original design and to manufacture the display module in
accordance with the customer's specifications. At a minimum, each module
includes an LCD, a custom LCD driver, and a flexible connector. We also provide
value-added services by assembling additional components onto the module, such
as key pads, plastics, speakers, light guides, and optics. LCD custom display
modules currently account for approximately 95.0% of our net sales.
We have developed a sophisticated design process to meet the specific needs
of our customers' applications. Each design project normally involves a
cross-functional team of our engineers who are assigned to a customer program.
The team consults with the customer's engineers throughout the design, prototype
development, and manufacturing process. We continue to supply value-added
engineering support after the design solution has been developed and integrated
into the manufacturing process in an ongoing effort to provide customers with
product performance enhancements and cost-reduction opportunities.
The difficulties in developing a custom LCD module include unclear customer
expectations, evolving customer requirements, and changing customer end-product
specifications. These factors result in lengthy lead times for market
introduction of customers' products. To overcome the traditional obstacles
involved in custom design and development, we have developed a four phase
program development process: the feasibility and concept phase, the prototype
phase, the pilot phase, and the high-volume production phase. We combine our
program development process with our philosophy of being a "seamless extension
of our customer." This results in a very flexible, responsive, accurate, and
fast development cycle that enables our customers to introduce their products
into the market rapidly. Our design and development process includes the
following phases:
- Feasibility and concept phase. We work closely with our customer to
understand its requirements. Customer input varies from rough sketches to
detailed specifications. Experienced LCD module design engineers work to
develop conceptual solutions to customer requirements that include both
design and cost parameters.
- Prototype phase. We conduct a design review with the customer; complete
at our Arizona facility a proposed design, including the electrical,
mechanical, and optical features of the LCD display module; and deliver a
prototype to the customer.
- Pilot phase. We perform a thorough design review with our customer,
involving an analysis of performance, cost, and volume production
considerations. A successful pilot phase results in the completion of any
design changes, the ordering of the tooling required for production, and
the delivery of manufacturing samples. We generally conduct the pilot
phase primarily in Manila.
- High-volume production phase. We complete any required changes in the
manufacturing process, receive necessary tooling, and commence
high-volume production. The production takes place either in Manila or
Beijing.
We also design and produce standard or "off-the-shelf" devices, which
involve designs that are adaptable to various uses with little or no
modification. Standard devices encompass a wide variety of display devices
having varied applications. Standard display devices include solid state lamps,
multi-digit numerical displays, integrated displays, and bar graph displays. In
1998 and the first six months of 1999, our standard devices accounted for less
than 5.0% of our net sales and consisted of non-LCD devices. In the latter half
of 1999, however, we plan to introduce new standard products that will
incorporate some of our new LCD display technologies.
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New Proprietary LCDs
We are pursuing two new technology initiatives for our LCD module business.
First, we have patented a new type of sunlight readable LCD display that we call
Liquid Crystal intense Display, or LCiD. This lower information content device
provides a multi-colored, emissive-looking display at passive LCD prices. We
also have created a higher information content display with numerous gray shades
but at the price of a more typical LCD. This new product is called Liquid
Crystal active Drive, or LCaD. This technology is based, in part, on technology
we license from Motif, Inc. and additional proprietary technology that we have
developed.
LCiD display devices include a display from as little as one line by five
character dot matrix to as large as four line by 20 character dot matrix, all
available in a variety of colors. While we have not begun shipping these devices
in volume, we expect that LCiD displays will be used primarily in lower
information content applications requiring high contrast, desired color, and
ease of readability from full sunlight to complete darkness. Typical
applications for standard LCiD display devices include automotive
instrumentation, appliances, hand-held instrumentation devices, vending
equipment, stereo equipment, embedded computing equipment, remote sensing
equipment, outdoor monitor equipment, and industrial controls.
LCaD display devices will include a variety of backlit 1/4 VGA (320 x 240
pixels), 16 gray shade capable display systems. The LCaD display will consist of
a complete display system incorporating an LCD panel, lighting, memory, an LCD
controller, and interface electronics. While we have not begun shipping these
devices in volume, typical applications for the LCaD display include medical and
industrial instrumentation, test equipment, point-of-sale terminals, mapping and
hand-held global positioning system devices, stereo equipment, and embedded
computing equipment.
LCoS Microdisplays
The display market demands continually greater information content at
reduced prices. In response to these demands, we are pursuing the
commercialization of our liquid crystal on silicon, or LCoS, microdisplays
following two years of extensive research and development activities. Our LCoS
technology provides very high-information content in a small size and at an
expected relatively low cost. The information presented by these displays is
magnified for view, generally either in a projector or in a viewfinder. We
believe that the inherent capability of our LCoS technology provides a
cost-effective solution to increased information demands.
Our current plan for the development of our LCoS microdisplay business is
to respond in an efficient manner to industry developments and changes, to
develop a dedicated organization infrastructure, and to develop or lead the
market to a common LCoS module platform. To meet our business objective of
becoming the leading supplier of microdisplay visual systems, we must rapidly
commercialize LCoS microdisplay technology on a cost-effective basis. This
requires us to focus on a common LCoS module platform that provides economies of
scale, rapid time to market, and broad market penetration. Specifically, our
strategy calls for a business preparation phase and a business growth phase. We
are currently in the preparation phase in which we are emphasizing research,
development, and licensing opportunities to expand our technology portfolio,
design engineering of LCoS products for a significant number of OEMs, and
management to establish an organization infrastructure. The business growth
phase calls for resources to be deployed primarily in high-volume manufacturing,
marketing, sales, and business development.
We are developing a broad range of LCoS microdisplay products to offer
customers. The table below sets forth various resolutions with pixel count, or
the number of color dots on a screen, and potential uses
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<PAGE> 42
for our LCoS microdisplays. We currently have available LCoS solutions, which we
have prototyped for customer evaluation, with the capability to produce all of
the following resolutions:
<TABLE>
<CAPTION>
RESOLUTION PIXELS
---------- ------ APPLICATIONS
<S> <C> <C> <C>
SVGA (digital) 800 x 600 Hand-held, lower power devices like PDAs or cellular
phones
SVGA (analog) 800 x 600 Full color, medium power applications, like head mounted
displays or wearable computers
XGA (digital) 1024 x 768 Portable audio-visual projectors
SXGA (analog) 1280 x 1024 Portable audio-visual projectors, monitors
HDTV (analog) 1920 x 1080 High definition television
</TABLE>
We believe that the initial markets for our LCoS microdisplay products will
be in front projectors, monitors, and high-definition television sets.
Currently, the front projector, rear projection, and high-definition television
markets are being served by active matrix polysilicon microdisplays and DMD
microdisplays. Polysilicon microdisplays are manufactured by several large
Japanese companies. These products are incapable of producing cost-effective
resolutions above XGA without the further expense of adding special optics and
are generally more expensive than anticipated for LCoS microdisplays. DMD
microdisplays are a proprietary product of Texas Instruments. Although DMDs have
no inherent resolution limitations, they are relatively expensive to
manufacture. The expected relatively low cost for LCoS microdisplays makes them
more suitable for competitive consumer marketplaces, such as portable business
projectors, monitors, and high-definition televisions. Currently, we are working
with several multinational OEMs that are interested in introducing products,
such as monitors and portable business projectors, in the year 2000.
We believe another market for LCoS microdisplay products will be converged
wireless products requiring high-information content displays for e-mail and
access to the Internet. Use of an LCoS microdisplay in a viewfinder application
would enable a person to carry a portable device capable of delivering the same
SVGA resolution as on the person's desktop or laptop computer. This has the
potential to allow portable access to the Internet and critical information,
such as calendars, maps, email, and documentation, in a handheld product. The
high resolution of the device would avoid scrolling or time-consuming text
conversions in accessing the World Wide Web for needed information.
We plan to offer a range of LCoS product solutions with different levels of
integration from individual light valves to fully integrated displays. By
adopting a modular approach to configuring and selling our LCoS microdisplays,
we will have the opportunity to price our products on a value-added basis and to
rapidly introduce new LCoS products. We will have undertaken extensive
development efforts before the first sale of LCoS products, and we expect to
incur substantial losses in the microdisplay business until the volume
production of LCoS microdisplays. We currently expect volume production to
commence in 2000.
SALES AND MARKETING
We approach sales and marketing on three levels: engineer to engineer,
salesperson to procurement, and factory to factory. Our approach is to treat an
existing program as a marketing platform for the next program. Our engineering,
marketing, and sales groups provide ongoing services to our customers throughout
the life of product programs. These services include implementing continuous
improvement tools related to both the product's cost and technical performance.
This service function allows us to market future sales within our customer base.
We market our services primarily in North America, Asia, and Europe through
a direct technical sales force. A staff of in-house, Arizona-based engineering
personnel directs and aids all sales personnel. We have North American direct
sales personnel in Arizona, California, Florida, Illinois, Massachusetts, and
North Carolina.
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Our sales to customers in Europe represented approximately 35.2% of net
sales in 1998 and approximately 45.0% of net sales in the first half of 1999. In
addition to a direct technical sales force, we distribute products in Europe
through a network of distributors, augmented in some regions by marketing
representatives. This network receives support from the marketing, customer
service, and support staff employed by our subsidiary, Three-Five Systems
Limited, located in Swindon, England.
Our sales to customers in Asia represented approximately 7.0% of net sales
in 1998 and approximately 23.0% of net sales in the first half of 1999. We have
added several direct technical sales and marketing persons in Asia and have also
trained Chinese application engineers to provide design input for our customers
in Asia. In July 1999, we signed an exclusive distributorship agreement with
Mitsui Co., Ltd. of Tokyo, Japan. Under this agreement, Mitsui will market and
sell our LCiD, LCaD, and LCoS products to customers in Japan.
CUSTOMERS
Our strategy involves concentrating our efforts on providing design and
production services to leading companies in five primary industries: cellular
telephones and other wireless communications, data collection, office
automation, medical equipment, and industrial controls. As a result, we
generally derive our net sales from services provided to a limited number of
customers.
Our largest customer is Motorola. Sales to Motorola accounted for
approximately 80.8% of our net sales in the first six months of 1999 and 63.6%
of our net sales in 1998. Sales to Motorola currently are made through seven
buyers operating in seven separate plants. We currently design and manufacture
display modules used in approximately 12 families of product programs for
Motorola. During the first six months of 1999, the five largest of these product
programs accounted for a total of 73.7% of our net sales, with the largest
program accounting for 31.9% of our net sales. During 1998, the five largest of
these product programs accounted for a total of 46.0% of our net sales, with the
largest program accounting for 14.6% of our net sales. Throughout this period,
substantially all of our net sales to Motorola have been for cellular telephone
applications. Motorola has an LCD module allocation process in which it
designates key LCD module vendors, including us, and communicates to each vendor
the anticipated annual range of purchases. Although the allocation process does
not provide a guarantee of business to us, it provides an indication that
purchases by Motorola during 1999 could exceed 1998 levels. See "Risk
Factors--Motorola accounts for a significant portion of our sales."
Hewlett-Packard Company was our second-largest customer in 1998. Sales to
Hewlett-Packard accounted for less than 10.0% of our net sales in 1998 and the
first six months of 1999. As the display modules we manufacture for
Hewlett-Packard moved into second generation versions in 1998, the selling price
of some of those modules was greatly reduced. In addition, the number of LCD
display modules required by Hewlett-Packard was also greatly reduced as
Hewlett-Packard moved to less expensive front panel devices in an extremely
competitive market for its products. Consequently, the percentage of our net
sales attributable to Hewlett-Packard declined substantially in 1998 over 1997.
BACKLOG
As of June 30, 1999, we had a backlog of orders of approximately $61.2
million. The backlog of orders as of December 31, 1998 was approximately $23.3
million. Our backlog consists of product orders for which confirmed purchase
orders have been received and which are scheduled for shipment within 12 months.
Most orders are subject to rescheduling or cancellation by the customer with
limited penalties. Because of the possibility of customer changes in delivery
schedules or cancellations and potential delays in product shipments, our
backlog as of a particular date may not be indicative of net sales for any
succeeding period.
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MANUFACTURING SERVICES, FACILITIES, AND QUALITY CONTROL
Manufacturing Services
We have organized our manufacturing geographically to optimize the
combination of technology and labor factors. This organization enables us to
compete solely on the basis of cost, if necessary, with suppliers of similar
products and services throughout the world. Our advanced manufacturing
techniques include surface mount technologies, chip-on-board, chip-on-flex,
chip-on-glass, flip-chip, tape automated bonding, and sophisticated testing
systems throughout these processes.
We seek to increase our value to our customers by providing responsive,
flexible, total manufacturing services. To date, our manufacturing services have
been concentrated on the manufacture of LCDs and assembly of display modules
that we have designed. We provide extended manufacturing services beyond these
core services, however, if the customer requires them. Extended services may
include adding additional components, such as a keypad, microphone, card reader,
product housing, or non-display electronic sub-assembly, or the turnkey
manufacture of a complete assembly.
Manufacturing Facilities
We currently conduct manufacturing operations in Arizona; Manila, the
Philippines; and Beijing, China. The Arizona facility houses a Class 1000 "clean
room" and LCD fabrication and prototyping operation. We utilize this facility
primarily to conduct LCD research and development, to produce prototype and
pre-production runs of devices for customer approval, to conduct full production
runs of low-volume devices, and to develop advanced manufacturing processes that
can be applied in Manila and Beijing during full-scale production. In addition,
the facility has the largest fully automated LCD production capacity in North
America. This highly automated line enables us to eliminate substantially our
dependence on foreign suppliers of LCDs. Facility personnel include a team of
experts ranging from LCD research scientists to specialized engineers with
backgrounds in electronics, mechanics, chemistry, physics, and manufacturing. We
maintain a wide variety of state-of-the-art testing and quality control
equipment at the facility.
We conduct high-volume display module manufacturing in Manila and Beijing.
In Manila, we are a party to a sub-assembly agreement with Technology Electronic
Assembly and Management Pacific Corporation, or TEAM, under which TEAM supplies
direct manufacturing services at a facility that TEAM owns and that is located
on land TEAM leases from the Philippine government. We also are party to a lease
agreement with TEAM under which TEAM leases space to us with respect to the
manufacturing operations services that TEAM performs under the sub-assembly
agreement. At the leased facility, TEAM manufactures, assembles, and tests
devices that we design pursuant to procedures set forth in the sub-assembly
agreement in accordance with our specifications. In 1997, we entered into an
amendment to the sub-assembly agreement with TEAM, resulting in all indirect
manufacturing employees, consisting primarily of technicians, supervisors, and
engineers, becoming our employees. As a result, under the sub-assembly agreement
TEAM now only supplies the direct labor and certain incidental services required
to manufacture our products. We own the manufacturing, assembling, and testing
equipment, including automated die attach and wire bond equipment with automatic
pattern recognition features for die and wire placement for LED die, as well as
the processes and documentation that TEAM uses at the Manila facility. We pay
TEAM for the direct manufacturing personnel based upon a negotiated available
hourly rate. We employ all professional personnel, including an operations
manager, with a support staff consisting of manufacturing supervisors;
manufacturing, quality, and process engineers; and logistics and administrative
personnel at the Manila facility.
Our sub-assembly agreement and lease agreement with TEAM extend through
December 31, 2000, and each is renewable from year to year thereafter. The
sub-assembly agreement requires us to maintain minimum production levels. The
termination of the lease agreement or sub-assembly agreement or the inability of
TEAM to fulfill its requirements under the sub-assembly agreement would require
us to acquire additional manufacturing facilities or to contract for additional
manufacturing services. The Philippines has been subject to volcanic eruptions,
typhoons, and substantial civil disturbances, including
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<PAGE> 45
attempted military coups against the government. Although we have not
experienced any material interruption of operations to date, these circumstances
could affect our ability to obtain products pursuant to the sub-assembly
agreement. The termination or our inability to obtain products under the
sub-assembly agreement, even for a relatively short period, would have a
material adverse effect on our operations and profitability.
We commenced manufacturing operations in Beijing during 1998. Our Beijing
facility is a high-volume display module manufacturing facility similar to our
current facility in Manila. We initially leased a facility in Beijing on a
temporary basis, and we commenced manufacturing at this facility in the third
quarter of 1998. We recently completed the construction of our permanent
facility in Beijing and have moved into that new facility. We employ all direct
and indirect manufacturing employees at the facility, including technicians,
supervisors, and engineers. We expect the initial cost of equipping and
constructing the Beijing facility to be $10.0 to $12.0 million.
Quality Control
We recognize the need to maintain a strong reputation for quality as a
means of retaining existing customers and securing additional orders from them
as well as attracting new customers. We have an extensive quality control
program and maintain at each of our facilities quality systems and processes
that meet or exceed the demanding standards set by many leading OEMs in targeted
industries. We base our quality control program upon statistical process
control, which advocates continual quantitative measurements of crucial
parameters and uses those measurements in a closed-loop feedback system to
control the manufacturing process. We perform product life testing to help
ensure long-term product reliability. We analyze results of product life tests
and take actions to refine the manufacturing process or enhance the product
design.
Increased global competition has led to increased customer expectations
with respect to price, delivery, and quality. Customers often evaluate price in
the quotation process and evaluate delivery and quality only after receiving the
product. Therefore, many customers preview a company's quality by viewing the
quality systems employed. We have received ISO 9002 certification of our Manila
manufacturing facility. ISO is a quality standard established by the
International Organization for Standardization, which attempts to ensure that
the processes used in development and production remain consistent. This is
accomplished through documentation maintenance, training, and management review
of the processes used. Although achieving an ISO 9002 certification does not
assure that we will obtain future business, it is a factor that enables our
customers to recognize that our production processes meet this established,
global standard of performance.
COMPONENTS AND RAW MATERIALS
Components and raw materials constitute a substantial portion of our
product costs. The principal components and raw materials we use in producing
our displays consist of LCD glass, application specific integrated circuits, or
ASICs, circuit boards, molded plastic parts, lead frames, and packaging
materials. Our procurement strategy is to secure alternative sources of supplies
for the majority of these materials. Many of these, however, must be obtained
from foreign suppliers, which subjects us to the risks inherent in obtaining
materials from foreign sources, including supply interruptions and currency
fluctuations. Our ability to produce a majority of our own LCD requirements in
our Arizona facility, however, has substantially reduced our dependence on
foreign suppliers. With one exception, our other suppliers generally are meeting
our requirements, and we believe our strategic supplier alliances have further
strengthened our relations with offshore suppliers. We have experienced material
shortages of ASICs in 1999, however, as a result of the increased worldwide
demand for cellular handsets. These shortages prevented us from shipping as much
as $3.0 million of our products in the first quarter of 1999. Similar shortages
in the future could have a material adverse effect on our business.
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RESEARCH AND DEVELOPMENT
We conduct an active and ongoing research, development, and engineering
program that focuses on advancing technology, developing improved design and
manufacturing processes, and improving the overall quality of the products and
services that we provide. Our goal is to provide our customers with new
solutions that address their needs. Research and development personnel
concentrate on LCD technology, especially on improving the performance of
current products and expanding the technology to serve new markets. We also
conduct research and development in manufacturing processes, including those
associated with efficient, high-volume production and electronic packaging.
With the availability of our high-volume LCD manufacturing line in Arizona,
we are focusing our research and development efforts on new display
technologies. We expect that these advanced display technologies will enable us
to provide our customers with differentiating products or products that provide
higher information content. These new technologies include active addressing,
sunlight readable LCDs, color LCDs, plastic LCDs, bi-stable LCDs, graphics and
color graphics, organic and polymer light emitting displays, and pixel-related
display technologies. These products may be available for use in custom devices
or in standard devices. We have undertaken a significant research and
development program and made substantial investments with respect to the
development of our LCoS microdisplays for potential use in projectors, monitors,
high-definition televisions and portable applications. We expect that the
majority of our available research and development personnel hours will be
dedicated to LCoS microdisplays in 1999.
INTELLECTUAL PROPERTY
We rely on a variety of intellectual property methods including patents,
trade secrets, trademarks, confidentiality agreements, licensing agreements, and
other forms of contractual provisions to protect our intellectual property.
Although our existing core business does not depend on any intellectual property
protection, we are manufacturing more advanced display products in which there
are intellectual property issues. For example, our LCiD technology is patented.
We have also filed for patents on our LCaD technology and have signed a license
agreement with Motif to license the technology that forms the basis of LCaD. The
license applies to all Motif patents relating to its active addressing chips and
system. The term of the license extends from June 1997 until the expiration of
the Motif patents. We have applied for a patent on our LCaD technology and have
filed several patents relating to our LCoS microdisplay technology. We have also
applied for numerous other process and product patents, all related to display
technologies. There can be no assurance that any of these patents will be issued
to us.
We have also taken several steps to both protect and advance our LCoS
microdisplay technology.
- We filed several patents relating to our LCoS microdisplay technology.
These patents cover the areas of product design and manufacturing process
technology.
- In July 1999, we purchased the assets, including all production and test
equipment, specialized laboratory equipment, and supporting design
documentation and software, of the former Light Valve business unit of
National Semiconductor. We also hired several key scientists of that
business unit and acquired an exclusive, paid-up, royalty free license on
all of the patents and intellectual property related to that business
unit. This license covers all intellectual property relating to the
processing, packaging, and testing of light valves and the integrated
circuits necessary to manufacture and sell both light valves and light
engines.
- In August 1999, we licensed the microdisplay technology of S-Vision
Corporation, a former microdisplay competitor that recently ceased
operations. Under this agreement, we acquired an irrevocable, royalty
free, fully paid-up, worldwide license to the intellectual property
associated with S-Vision's digital backplane and optical systems, which
provides us rights to manufacture certain microdisplay products and
patented optical engines. In addition, S-Vision assigned us a patent
relating to the design and manufacture of microdisplay products.
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COMPETITION
We believe that Hosiden, Hyundai, Optrex, PCI, Philips Components, Samsung,
Seiko-Epson, Seiko Instruments, and Sharp constitute the principal competitors
for our passive LCD devices. Most of these competitors are large companies that
have greater financial, technical, marketing, manufacturing, vertical
integration, and personnel resources than we do. Our sales, profitability, and
success depend substantially upon our ability to compete with other providers of
display modules. We cannot provide assurance that we will continue to be able to
compete successfully with these organizations.
We currently compete principally on the basis of the technical innovation,
engineering service, and performance of our display modules, including their
ease of use and reliability, as well as on their cost, timely design, and
manufacturing and delivery schedules. Our competitive position could be
adversely affected if one or more of our customers, particularly Motorola,
determines to design and manufacture their display modules internally or secures
them from other parties. Other large companies are currently pursuing
microdisplay solutions. Texas Instruments has developed a product that competes
with our LCoS technology, and IBM is producing a similar liquid crystal on
silicon display based on its own technology. Numerous other established and
start-up companies are also pursuing similar and related technologies that may
compete with our LCoS technology.
ENVIRONMENTAL REGULATIONS
Our operations create a small amount of hazardous waste, including various
epoxies, gases, inks, solvents, and other wastes. The amount of hazardous waste
we produce may increase in the future depending on changes in our operations.
The general issue of the disposal of hazardous waste has received increasing
focus from federal, state, local, and international governments and agencies and
has been subject to increasing regulation.
EMPLOYEES
As of June 30, 1999, we employed a total of 1,976 persons, of whom 1,064
were employed through third-party contracts. Of our direct employees, 181 were
full-time and seven were temporary employees at our principal U.S. facility in
Arizona and U.S. sales offices; 240 were employees at our manufacturing facility
in Manila; 475 were employees at our manufacturing facility in Beijing; and nine
were employees at our Three-Five Systems, Limited subsidiary in Swindon,
England. We consider our relationship with our employees to be good, and none of
our employees currently are represented by a union in collective bargaining with
us.
TEAM provides the personnel engaged in the direct assembly of our devices
in Manila under the sub-assembly agreement between us and TEAM. As of June 30,
1999, 1,064 persons performed direct labor operations at the Manila facility
through the sub-assembly agreement with TEAM.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding our directors,
executive officers and certain key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- --- -------------
<S> <C> <C>
Jack L. Saltich................... 56 President, Chief Executive Officer, and Director
Jeffrey D. Buchanan............... 43 Executive Vice President--Finance, Administration, and
Legal; Chief Financial Officer; Secretary; Treasurer; and
Director
Carl E. Derrington................ 49 Vice President, Chief Manufacturing Officer
Robert T. Berube.................. 61 Principal Accounting Officer and Corporate Controller
James F. Bowser................... 58 Vice President--New Business Development
Charles K. Rahrig................. 44 Vice President--Design Engineering
Dan J. Schott..................... 60 Vice President--Research and Development
Elizabeth A. Sharp................ 37 Vice President--Corporate Relations
David C. Malmberg(1)(2)........... 56 Chairman of the Board
Kenneth M. Julien(1)(2)........... 45 Director
Gary R. Long(1)(2)................ 67 Director
Thomas H. Werner(1)(2)............ 39 Director
</TABLE>
- -------------------------
(1) Member of the compensation committee
(2) Member of the audit committee
Jack L. Saltich has served as a director and the President and Chief
Executive Officer of our company since July 1999. Mr. Saltich served as Vice
President of Advanced Micro Devices from May 1993 until July 1999; as Executive
Vice President of Applied Micro Circuits Corp. from January 1991 until March
1993; and as Vice President of VLSI from July 1988 until January 1991. Mr.
Saltich held a variety of executive positions for Motorola from July 1971 until
June 1988. These positions included serving as an Engineering Manager from May
1974 until January 1980, an Operation Manager from January 1980 until May 1982,
a Vice President and Director of the Bipolar Technology Center from May 1982
until June 1986, and a Vice President and Director of the Advanced Product
Research and Development Laboratory from June 1986 until June 1988.
Jeffrey D. Buchanan has served as a director and Executive Vice
President--Finance, Administration, and Legal of our company since June 1998; as
Chief Financial Officer and Treasurer since June 1996; and as Secretary since
May 1996. Mr. Buchanan served as our Vice President--Finance, Administration,
and Legal from June 1996 until July 1998 and as our Vice President--Legal and
Administration from May 1996 to June 1996. Mr. Buchanan served from June 1986
until May 1996 as a business lawyer with O'Connor, Cavanagh, Anderson,
Killingsworth & Beshears, where his practice emphasized mergers and
acquisitions, joint ventures, and taxation. Mr. Buchanan was associated with the
international law firm of Davis Wright Tremaine from 1984 to 1986, and he was a
senior staff person at Deloitte & Touche from 1982 to 1984. Mr. Buchanan is a
member of the Arizona and Washington state bars and passed the certified public
accounting examination in 1983.
Carl E. Derrington has been our Chief Manufacturing Officer since May 1999.
Mr. Derrington joined our company in 1986 as a Director of Research and
Development. Since that time, Mr. Derrington has served as a Plant Manager from
January 1986 until September 1987, a Director of Engineering from September 1987
until August 1989, a Director of Manufacturing from August 1989 until April
1996, and a Director of Manufacturing Engineering from April 1996 until April
1999.
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Robert T. Berube has been our Principal Accounting Officer since July 1998
and has served as our Corporate Controller since July 1990. Mr. Berube served as
Chief Financial Officer of Electronic Research Associate, Inc., a manufacturing
company, from July 1977 until April 1990.
James F. Bowser has been our Vice President--New Business Development since
June 1998. He has also served as our Vice President of Sales and Marketing, Vice
President of Operations, Director of Sales, and Senior Vice President of
Marketing and New Product Development at various times since August 1990. From
1985 until August 1990, Mr. Bowser worked for National Computer Systems, a
producer of hardware and software for the financial and educational market
sectors, as Vice President and General Manager, Financial Systems Division, and
as Vice President of Operations.
Charles K. Rahrig has been our Vice President--Design Engineering since
September 1998. He joined our company in July 1996 as our Director of Program
Management. From 1979 until 1996, Mr. Rahrig held a variety of technical and
management posts at Honeywell, Inc., including Engineering Section Head from
1988 until 1992 and Engineering Department Manager from 1992 until his departure
in 1996.
Dan J. Schott has been our Vice President--Research and Development since
July 1996. From January 1994 until July 1996, he served as our Vice President of
Technology. From 1988 to January 1994, Mr. Schott was an Associate Director with
Honeywell Inc., where his responsibilities included flat panel display research
and development. From 1981 until 1987, Mr. Schott held various engineering
management and program management positions with Sperry Rand Corp.
Elizabeth A. Sharp has been our Vice President--Corporate Relations since
April 1996. Ms. Sharp served as our Director of Human Resources from May 1992
until April 1996, as our Corporate Administrator from April 1988 until May 1992,
as our Personnel Manager from April 1987 until April 1988, and as our
Administrative Assistant to the President and Chief Financial Officer from May
1986 until April 1987.
David C. Malmberg has been a director of our company since April 1993 and
Chairman of the Board since April 1999. Mr. Malmberg is a private investor and
management consultant. Before resigning in May 1994, Mr. Malmberg spent 22 years
at National Computer Systems, including 13 years as its President and Chief
Operating Officer. Mr. Malmberg serves as the Chairman of the Board of National
City Bancorporation and is a member of the boards of directors of PPT/Vision,
Inc., and Fieldworks, Inc., all publicly held companies. He also serves on the
board of directors of Concerted Technology, Inc., and the Board of Trustees for
Mankato State University.
Kenneth M. Julien has been a director of our company since October 1996.
Mr. Julien has served as President and a director of Julien Aerospace Systems,
Inc., an aerospace parts supplier, since November 1996 and as Managing Director
of Julien Investments LLC, a real estate development and lending company, since
August 1994. Mr. Julien served as our Executive Vice President and Chief
Operating Officer from August 1992 to April 1993; as Vice President, Chief
Financial Officer, and Secretary of our company or one of our predecessors from
May 1988 to August 1992; and as a director of our company or one of its
predecessors from July 1987 to May 1990. Mr. Julien served as a Vice President
and Chief Financial Officer of Cerprobe Corporation, a publicly held company
engaged in the business of designing, manufacturing, and marketing semiconductor
test equipment, from October 1983 to May 1988. Mr. Julien also served as a
director of Cerprobe from February 1988 to June 1988.
Gary R. Long has been a director of our company since October 1996. Mr.
Long served as President and Chief Executive Officer of CalComp Technology,
Inc., a computer peripherals company, from January 1994 until his retirement in
February 1997. Mr. Long served as Senior Vice President and General Manager of
CalComp's Digitizer Products Division in Scottsdale, Arizona, from 1980 to
January 1994. Prior to 1980, Mr. Long served as Vice President of Operations for
Talos Systems, which designed and manufactured digitizers for the computer
graphics industry.
Thomas H. Werner has been a director of our company since March 1999. Mr.
Werner has served as Vice President and General Manager for the LAN Connectivity
Division of 3Com Corporation since
45
<PAGE> 50
October 1998. From January 1996 until September 1998, Mr. Werner was Vice
President of the Manufacturing Personal Communication Division of U.S. Robotics,
which 3Com Corporation acquired in June 1997. Mr. Werner also served in various
positions at Oak Frequency Control, a manufacturer of telecommunications
components, most recently as President of the Networks Group, from February 1994
until January 1996.
Directors hold office until the next annual meeting of stockholders or
until their successors have been elected and qualified. Officers serve at the
pleasure of the board of directors.
46
<PAGE> 51
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock on August 25, 1999 by (1) each of our directors
and executive officers, (2) all our directors and executive officers as a group,
(3) each person known by us to own more than 5% of our common stock, and (4) the
selling stockholder. Each of the principal and selling stockholders may be
reached through us at 1600 North Desert Drive, Tempe, Arizona 85281.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY
OFFERING SHARES BEING OWNED AFTER OFFERING
---------------------- OFFERED FOR ----------------------
NAME OF BENEFICIAL OWNER NUMBER(1) PERCENT(2) SALE NUMBER(1) PERCENT(2)
- ------------------------------------------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Jack L. Saltich.................................. 2,000 * -- 2,000 *
Jeffrey D. Buchanan(3)........................... 69,340 * -- 69,340 *
Carl E. Derrington(4)............................ 36,200 * -- 36,200 *
Dan J. Schott(5)................................. 36,000 * -- 36,000 *
Robert T. Berube(6).............................. 4,750 * -- 4,750 *
David C. Malmberg(7)............................. 28,339 * -- 28,339 *
Kenneth M. Julien(8)............................. 5,081 * -- 5,081 *
Gary R. Long(9).................................. 8,381 * -- 8,381 *
Thomas H. Werner(10)............................. 1,422 * -- 1,422 *
All directors and executive officers as a group
(nine persons)................................. 191,513 2.7% -- 191,513 2.1%
SELLING STOCKHOLDER:
David R. Buchanan(11)............................ 874,118 12.4% 300,000 574,118 6.3%
</TABLE>
- ------------------
* Less than 1% of the outstanding shares of common stock
(1) Includes, when applicable, shares owned of record by the stockholder's
minor children and spouse and by other related individuals and entities
over whose shares of common stock such person has custody, voting control,
or power of disposition. Also includes shares of common stock that the
stockholder had the right to acquire within 60 days of August 25, 1999 by
the exercise of vested stock options.
(2) The percentages shown include the shares of common stock which the person
will have the right to acquire within 60 days of August 25, 1999. In
calculating the percentage of ownership, all shares of common stock which
the identified person will have the right to acquire within 60 days of
August 25, 1999 upon the exercise of vested stock options are deemed to be
outstanding for the purpose of computing the percentage of shares of common
stock owned by such person, but are not deemed to be outstanding for the
purpose of computing the percentage of the shares of common stock owned by
any other person.
(3) Includes 41,250 shares of common stock issuable upon exercise of vested
stock options.
(4) Includes 200 shares of common stock held by Mr. Derrington as custodian for
his minor child.
(5) Includes 32,000 shares of common stock issuable upon exercise of vested
stock options.
(6) Includes 2,750 shares of common stock issuable upon exercise of vested
stock options.
(7) Includes 4,332 shares of common stock issuable upon exercise of vested
stock options.
(8) Includes 1,874 shares of common stock issuable upon exercise of vested
stock options.
(9) Includes 1,874 shares of common stock issuable upon exercise of vested
stock options, and 5,000 shares of common stock held by the Long Revocable
Trust, Gary R. Long and Carol L. Long, Trustees.
(10) Includes 416 shares of common stock issuable upon exercise of vested stock
options.
(11) Includes 50,000 shares of common stock issuable upon exercise of vested
stock options. Mr. Buchanan served as Chairman of the Board from February
1990 until April 1999 and as President and Chief Executive Officer from
February 1990 until July 1998 and as interim President and Chief Executive
Officer from January 1999 until July 1999.
47
<PAGE> 52
UNDERWRITING
The underwriters named below, represented by Needham & Company, Inc., ING
Barings LLC, and J.C. Bradford & Co. (the Representatives), have severally
agreed, subject to the terms and conditions set forth in the Underwriting
Agreement, to purchase from us the number of shares of common stock indicated
below opposite their respective names at the public offering price less the
underwriting discount set forth on the cover page of this prospectus. The
Underwriting Agreement provides that the obligations of the underwriters to pay
for and accept delivery of such shares are subject to certain conditions
precedent, and that the underwriters are committed to purchase all of such
shares, if any are purchased.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Needham & Company, Inc. ....................................
ING Barings LLC.............................................
J.C. Bradford & Co. ........................................
---------
Total............................................. 2,300,000
=========
</TABLE>
The Representatives have advised us that the underwriters initially propose
to offer the shares of common stock to the public on the terms set forth on the
cover page of this prospectus. The underwriters may allow to selected dealers a
concession of not more than $ per share, and the underwriters may allow, and
such dealers may reallow, a concession of not more than $ per share to
certain other dealers. After this offering, the offering price and other selling
terms may be changed by the Representatives. We estimate that the total offering
expenses, other than underwriting discounts and commissions, will be $360,000.
We have granted an option to the underwriters, exercisable during the
30-day period after the date of this prospectus, to purchase up to 345,000
additional shares of common stock at the same price per share as the initial
2,300,000 shares to be purchased by the underwriters. To the extent that the
underwriters exercise this option, each of the underwriters will be committed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table, and we and
the selling stockholder will be obligated to sell such shares to the
underwriters. The underwriters may purchase such shares only to cover
overallotments made in connection with this offering. If purchased, the
underwriters will offer such additional shares on the same terms as those on
which the 2,300,000 shares are being offered.
Our directors and executive officers and the selling stockholder, holding
in the aggregate 631,135 shares of common stock after this offering, have agreed
that, for a period of 90 days after the date of this prospectus, they will not,
without the prior written consent of Needham & Company, directly or indirectly
sell, offer to sell or otherwise dispose of any such shares of common stock or
any right to acquire such shares. In addition, we have agreed that, for a period
of 90 days after the date of this prospectus, we will not, without the prior
written consent of Needham & Company, issue, offer, sell, grant options to
purchase, or otherwise dispose of any of our equity securities or any other
securities convertible into or exchangeable for the common stock or other equity
security, other than the grant of options to purchase common stock or the
issuance of shares of common stock under our stock option and stock purchase
plans and the issuance of shares of common stock pursuant to the exercise of
outstanding options and warrants.
The Underwriting Agreement provides that we indemnify the several
underwriters against certain liabilities, including civil liabilities under the
Securities Act of 1933, or will contribute to payments the underwriters may be
required to make arising from these types of liabilities.
48
<PAGE> 53
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Greenberg Traurig, P.A., Phoenix, Arizona. Certain legal matters
relating to this offering will be passed upon for the underwriters by Gray Cary
Ware & Freidenrich LLP, Palo Alto, California.
EXPERTS
The audited financial statements of the Company as of December 31, 1997 and
1998, and for each of the years in the three-year period ended December 31, 1998
included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-3 with the Securities and
Exchange Commission relating to the common stock offered by this prospectus.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. Statements contained in this prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance we refer you to the copy of the contract or other document filed as an
exhibit to the registration statement, each such statement being qualified in
all respects by such reference.
For further information with respect to Three-Five Systems, Inc. and the
common stock offered by this prospectus, we refer you to the registration
statement, exhibits and schedules. A copy of the registration statement may be
inspected by anyone without charge at the public reference facilities maintained
by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; the
Chicago Regional Office, Suite 1400, 500 West Madison Street, Citicorp Center,
Chicago, Illinois 60661; and the New York Regional Office, Suite 1300, 7 World
Trade Center, New York, New York 10048. Copies of all or any part of the
registration statement may be obtained from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the
prescribed fees. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The registration
statement is also available through the SEC's Web site at the following address:
http://www.sec.gov.
49
<PAGE> 54
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference the information we file with
it, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus and information we file later with the SEC will
automatically update and supersede this information. We incorporate by reference
the documents listed below and any future filings made by us with the SEC under
Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until
the sale of all of the shares of common stock that are part of this offering.
The documents we are incorporating by reference are as follows:
- our Annual Report on Form 10-K for the year ended December 31, 1998,
filed on March 15, 1999;
- our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999,
filed on May 17, 1999;
- our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999,
filed on July 29, 1999;
- the description of our common stock contained in our registration
statement on Form 8-A (Registration No. 1-4373) declared effective by the
SEC on December 28, 1994, including any amendments or reports filed for
the purpose of updating that description; and
- our Proxy Statement, filed on March 19, 1999.
Any statement contained in a document that is incorporated by reference
will be modified or superseded for all purposes to the extent that a statement
contained in this prospectus (or in any other document that is subsequently
filed with the SEC and incorporated by reference) modifies or is contrary to
that previous statement. Any statement so modified or superseded will not be
deemed a part of this prospectus except as so modified or superceded.
You may request a copy of these filings at no cost by writing or
telephoning our investor relations department at the following address and
telephone number:
Three-Five Systems, Inc.
1600 North Desert Drive
Tempe, Arizona 85281
(602) 389-8600
50
<PAGE> 55
THREE-FIVE SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and June 30, 1999......................................... F-3
Consolidated Statements of Income (Loss) for the years ended
December 31, 1996, 1997, and 1998 and the six months ended
June 30, 1998 and 1999.................................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997, and 1998............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997, and 1998 and the six months ended
June 30, 1998 and 1999.................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Three-Five Systems, Inc.:
We have audited the accompanying consolidated balance sheets of THREE-FIVE
SYSTEMS, INC. (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1998, and the related consolidated statements of income (loss),
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Three-Five Systems, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
January 22, 1999.
F-2
<PAGE> 57
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Note 2)..................... $16,371 $ 4,946 $ 5,777
Accounts receivable, net............................... 12,540 18,601 24,590
Inventories, net (Note 2).............................. 8,255 12,493 15,249
Deferred tax asset (Note 5)............................ 4,311 2,680 2,649
Other current assets................................... 1,228 2,313 1,952
------- ------- -------
Total current assets.............................. 42,705 41,033 50,217
Property, Plant and Equipment, net (Note 2)................. 29,847 33,314 35,830
Other Assets................................................ 283 3,557 3,536
------- ------- -------
$72,835 $77,904 $89,583
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................... $ 8,513 $10,649 $17,305
Accrued liabilities (Note 2)........................... 5,079 4,673 4,461
Current taxes payable (Note 5)......................... -- 235 18
Current portion of long-term debt (Note 3)............. -- 651 6,461
------- ------- -------
Total current liabilities......................... 13,592 16,208 28,245
------- ------- -------
Long-term Debt (Note 3)..................................... -- 7,444 6,634
------- ------- -------
Deferred tax liability (Note 5)............................. 2,718 3,156 3,104
------- ------- -------
Commitments and contingencies (Note 6)
Stockholders' Equity (Note 4):
Preferred stock, $.01 par value; 1,000,000 shares
authorized............................................ -- -- --
Common stock, $.01 par value; 15,000,000 shares
authorized, 7,928,023 shares issued, 7,905,523 shares
outstanding at December 31, 1997; 7,974,901 shares
issued, 7,005,107 shares outstanding at December 31,
1998.................................................. 79 80 80
Additional paid-in capital............................. 32,420 32,484 32,545
Retained earnings...................................... 24,259 26,849 27,247
Cumulative translation adjustment (Note 2)............. 20 8 10
Less--Treasury stock, at cost (969,794 shares)......... (253) (8,325) (8,282)
------- ------- -------
Total stockholders' equity........................ 56,525 51,096 51,600
------- ------- -------
$72,835 $77,904 $89,583
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 58
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales (Note 7)........................ $ 60,713 $ 84,642 $ 95,047 $ 41,161 $ 54,644
---------- ---------- ---------- ---------- ----------
Costs and Expenses:
Cost of sales........................ 58,321 64,760 76,149 30,782 45,294
Selling, general and
administrative..................... 5,351 6,557 7,334 3,434 4,942
Research and technology.............. 4,065 5,106 7,159 3,593 3,829
---------- ---------- ---------- ---------- ----------
67,737 76,423 90,642 37,809 54,065
---------- ---------- ---------- ---------- ----------
Operating income (loss).............. (7,024) 8,219 4,405 3,352 579
---------- ---------- ---------- ---------- ----------
Other Income (Expense):
Interest, net........................ 412 548 75 322 (366)
Other, net........................... (139) (190) (117) (23) (33)
---------- ---------- ---------- ---------- ----------
273 358 (42) 299 (399)
---------- ---------- ---------- ---------- ----------
Income (loss) before provision for
(benefit from) income taxes............. (6,751) 8,577 4,363 3,651 180
Provision for (benefit from) income
taxes (Note 5)....................... (2,920) 3,334 1,773 1,533 (218)
---------- ---------- ---------- ---------- ----------
Net income (loss)......................... $ (3,831) $ 5,243 $ 2,590 $ 2,118 $ 398
========== ========== ========== ========== ==========
Earnings (Loss) Per Common Share (Note 2):
Basic................................ $ (0.49) $ 0.67 $ 0.34 $ 0.27 $ 0.06
========== ========== ========== ========== ==========
Diluted.............................. $ (0.49) $ 0.65 $ 0.33 $ 0.26 $ 0.06
========== ========== ========== ========== ==========
Weighted Average Number of Common Shares:
Basic................................ 7,767,744 7,854,053 7,638,631 7,913,107 7,015,230
========== ========== ========== ========== ==========
Diluted.............................. 7,767,744 8,089,975 7,802,041 8,141,307 7,119,508
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 59
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL CUMULATIVE TOTAL
SHARES PAID-IN RETAINED TREASURY TRANSLATION STOCKHOLDERS' COMPREHENSIVE
ISSUED AMOUNT CAPITAL EARNINGS STOCK ADJUSTMENT EQUITY INCOME
--------- ------ ---------- -------- -------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1995...................... 7,735,745 $77 $32,286 $22,847 $ -- $ 14 $55,224
Net loss.................... -- -- -- (3,831) -- -- (3,831) $(3,831)
Other comprehensive income
Foreign currency
translation
adjustments........... -- -- -- -- -- -- -- --
-------
Comprehensive income.... -- -- -- -- -- -- -- $(3,831)
=======
Stock options exercised..... 44,084 1 11 -- -- -- 12
Tax benefit from early
disposition of incentive
stock options............. -- -- 32 -- -- -- 32
Purchase of treasury
stock..................... -- -- -- -- (253) -- (253)
--------- --- ------- ------- ------- ---- -------
BALANCE, DECEMBER 31,
1996...................... 7,779,829 78 32,329 19,016 (253) 14 51,184
Net income.................. -- -- -- 5,243 -- -- 5,243 $ 5,243
Other comprehensive income
Foreign currency
translation
adjustments........... -- -- -- -- -- 6 6 6
-------
Comprehensive income.... -- -- -- -- -- -- -- $ 5,249
=======
Stock options exercised..... 148,194 1 50 -- -- -- 51
Tax benefit from early
disposition of incentive
stock options............. -- -- 41 -- -- -- 41
--------- --- ------- ------- ------- ---- -------
BALANCE, DECEMBER 31,
1997...................... 7,928,023 79 32,420 24,259 (253) 20 56,525
Net income.................. -- -- -- 2,590 -- -- 2,590 $ 2,590
Other comprehensive income
Foreign currency
translation
adjustments........... -- -- -- -- -- (12) (12) (12)
-------
Comprehensive income.... -- -- -- -- -- -- -- $ 2,578
=======
Stock options exercised..... 46,878 1 64 -- -- -- 65
Purchase of treasury
stock..................... -- -- -- -- (8,072) -- (8,072)
--------- --- ------- ------- ------- ---- -------
BALANCE, DECEMBER 31,
1998...................... 7,974,901 $80 $32,484 $26,849 $(8,325) $ 8 $51,096
========= === ======= ======= ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 60
THREE-FIVE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(3,831) $ 5,243 $ 2,590 $ 2,118 $ 398
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities by operating
activities
Depreciation and amortization............................. 3,551 4,135 4,693 2,178 2,605
Provision for (reduction of) accounts receivable valuation
reserves................................................ 47 (69) (64) (15) 117
Provision for (reduction of) inventory valuation
reserves................................................ 4,015 (2,473) (3,184) (803) 1,561
Loss on disposal of assets................................ 12 2 -- -- --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable.............. 2,469 (5,641) (5,997) (1,794) (6,106)
(Increase) decrease in inventories...................... 5,082 (1,176) (1,054) (13,341) (4,316)
(Increase) decrease in other assets..................... (1,070) 505 (1,425) (153) 363
Increase in accounts payable and accrued liabilities.... 4,296 4,778 1,730 7,917 6,443
Increase (decrease) in taxes payable, net............... (2,358) 1,461 2,649 1,851 (238)
------- ------- -------- -------- -------
Net cash (used in) provided by operating activities... 12,213 6,765 (62) (2,042) 827
------- ------- -------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................... (948) (3,050) (8,119) (4,880) (5,102)
Proceeds from sale of property, plant and equipment......... 5 19 -- -- --
Investment in Siliscape, Inc................................ -- -- (3,320) (2,420) --
------- ------- -------- -------- -------
Net cash used in investing activities................. (943) (3,031) (11,439) (7,300) (5,102)
------- ------- -------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) notes payable to banks...... (3,000) -- 8,095 -- 5,000
Stock options exercised..................................... 12 51 65 48 61
Purchase of treasury stock.................................. (253) -- (8,072) 22 43
------- ------- -------- -------- -------
Net cash provided by (used in) financing activities... (3,241) 51 88 70 5,104
------- ------- -------- -------- -------
Effect of exchange rate changes on cash..................... -- 6 (12) (14) 2
------- ------- -------- -------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ 8,029 3,791 (11,425) (9,286) 831
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 4,551 12,580 16,371 16,371 4,946
------- ------- -------- -------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $12,580 $16,371 $ 4,946 $ 7,085 $ 5,777
======= ======= ======== ======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................... $ 60 $ 4 $ 364
======= ======= ========
Income taxes paid........................................... $ 1,832 $ 1,973 $ 992
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 61
THREE-FIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997, AND 1998 AND JUNE 30, 1999
(1) ORGANIZATION AND OPERATIONS:
Three-Five Systems, Inc. (the Company) offers advanced design and
manufacturing services to a wide range of original equipment manufacturers
(OEMs). Most of the Company's sales consist of custom display modules developed
in close collaboration with its customers. Devices designed and manufactured by
the Company find application in communication devices as well as in office,
industrial, medical and commercial electronics products. The Company currently
specializes in liquid crystal display (LCD) components and technology in
providing its design and manufacturing services for its customers. The Company
markets its services primarily in North America, Europe, and Asia through direct
technical sales persons and, to a much lesser extent, through an independent
sales and distribution network.
The Company currently conducts manufacturing operations in Tempe, Arizona;
Manila, the Philippines; and Beijing, China. The Company believes that the
Arizona facility has the largest fully automated LCD glass production capacity
outside of Asia. High-volume LCD module manufacturing is done in Manila, the
Philippines and Beijing, China. In Manila, a third-party subcontractor operates
the facility under a sub-assembly agreement with the Company utilizing
equipment, processes, and documentation owned by the Company. The sub-assembly
agreement has a current term extending through December 31, 1999, and from year
to year thereafter, but may be terminated by either party upon 180 days written
notice. The termination of or the inability of the Company to obtain products
pursuant to the sub-assembly agreement, even for a relatively short period,
would have a material adverse effect on the operations and profitability of the
Company. Since December 1994, the Company has made advances totaling
approximately $2.2 million to the subcontractor to help the subcontractor meet
its working capital needs. As of December 31, 1998, the subcontractor has repaid
$2.0 million of these advances. The amounts payable to the subcontractor more
than exceeded the $205,000 advances outstanding at December 31, 1998. These
advances are secured by future payments for subcontracting services to be
provided to the Company. The Company commenced manufacturing operations in China
during 1998. The China facility is a high-volume LCD module manufacturing
facility similar to the Company's facility in Manila. The Company initially
leased a facility in Beijing on a temporary basis, which expires in mid-1999,
and the Company commenced manufacturing operations in that temporary facility in
the second quarter of 1998. The Company has begun construction of its own
facility in Beijing and expects to move into the new facility in the middle of
1999. Any significant delay in the construction of the permanent facility could
result in the temporary shutdown of the China manufacturing operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation and Preparation of Financial Statements
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany transactions have
been eliminated.
Unaudited interim results
The accompanying interim consolidated financial statements as of June 30,
1999, and for the six months ended June 30, 1998 and 1999, together with the
related notes, are unaudited. The unaudited interim financial statements have
been prepared on the same basis as the annual financial statements and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's financial
position, results of operations and its cash flows as of June 30, 1999 and for
the six months ended June 30, 1998 and 1999. The results for the six months
ended June 30, 1999 are not necessarily indicative of the results to be expected
for the year ending December 31, 1999.
F-7
<PAGE> 62
THREE-FIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Three-Five Systems Limited (Limited), a wholly-owned subsidiary of the
Company, is incorporated in the United Kingdom. Limited sells and distributes
the Company's products to customers on the European continent.
Three-Five Systems Pacific, Inc. (Pacific), a Philippines corporation,
procures supplies primarily from Philippine vendors. Pacific also manages and
assists production personnel of the third-party subcontractor that operates the
facility in the Philippines.
During the first quarter of 1998, the Company formed a wholly-owned
subsidiary in China, Three-Five Systems (Beijing) Co., Ltd. (Beijing). Beijing
manufactures and sells the Company's products to customers primarily located in
Asia.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by
the Company using available market information and valuation methodologies.
Considerable judgment is required in estimating fair values. Accordingly, the
estimates may not be indicative of amounts that would be realized in a current
market exchange. The carrying values of cash, accounts receivable, and accounts
payable approximate fair value due to the short maturities of these instruments.
In addition, the carrying amount on the outstanding revolving line of credit
facility is estimated to approximate fair value as the actual interest rate is
consistent with rates estimated to be currently available for debt with similar
terms and remaining maturities.
Cash and Cash Equivalents
For purposes of the statements of cash flows, all highly liquid investments
with a maturity of three months or less at the time of purchase are considered
to be cash equivalents. Cash equivalents consist of investments in commercial
paper, marketable debt securities, money market mutual funds, and United States
government agencies' obligations and are classified as held-to-maturity in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Cash
equivalents were $12,886,000 and $1,992,000 at December 31, 1997 and December
31, 1998, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value. Reserves are established against Company-owned inventories for
excess, slow-moving, and obsolete items and for items where the net realizable
value is less than cost. The reserve for obsolete inventory totaled $4,309,000
and $1,125,000 at December 31, 1997 and December 31, 1998, respectively.
F-8
<PAGE> 63
THREE-FIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1997 1998 1999
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw Materials......................................... $6,052 $ 9,367 $10,800
Work-in-process....................................... 1,195 1,459 2,322
Finished goods........................................ 1,008 1,667 2,127
------ ------- -------
$8,255 $12,493 $15,249
====== ======= =======
</TABLE>
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and generally is
depreciated using the straight-line method over the estimated useful lives of
the respective assets, which range from 3 to 39 years. During 1996, the Company
placed into service a high-volume LCD manufacturing line in its Tempe, Arizona
manufacturing facility. The Company is depreciating the LCD manufacturing line
using the units of production method. Depreciation expense recorded using this
method may be subject to significant fluctuation from year to year resulting
from changes in actual production levels and ongoing analysis of the capacity of
the equipment. Property, plant and equipment consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Building and improvements........................ $ 10,431 $ 13,031 $ 15,997
Furniture and equipment.......................... 31,804 37,324 39,459
-------- -------- --------
42,235 50,355 55,456
Less accumulated depreciation.................... (12,388) (17,041) (19,626)
-------- -------- --------
$ 29,847 $ 33,314 $ 35,830
======== ======== ========
</TABLE>
The Company utilizes a significant portion of the high-volume LCD
manufacturing line facility to produce a substantial portion of its own
requirements for LCDs. The successful utilization of the LCD manufacturing line
requires the Company to (i) produce LCDs on a timely and cost-effective basis at
quality levels at least equal to product available from independent suppliers
and (ii) utilize the LCDs it produces in devices it designs and manufactures in
a manner satisfactory to its customers. Although management believes that the
manufacturing facility will be successfully utilized, no assurance can be given
that the Company will not experience problems or delays in conducting its LCD
manufacturing operations. Such problems could require the Company to continue to
purchase its LCD requirements from third parties and result in the inability of
the Company to recover its investment in the manufacturing facility.
During 1996, the Company entered into a transaction, in which it conveyed
its Tempe, Arizona facility and certain improvements to the City of Tempe as
consideration for a rent-free 75-year lease. The Company has the option to
repurchase the facility for $1,000 after ten years; therefore, the lease is
accounted for as a capital lease.
Accrued Liabilities
Accrued liabilities include accrued compensation of approximately
$1,675,000 and $975,000 at December 31, 1997 and 1998, respectively.
F-9
<PAGE> 64
THREE-FIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foreign Currency Translation
Financial information relating to the Company's foreign subsidiaries is
reported in accordance with SFAS No. 52, Foreign Currency Translation. The
functional currency of each of Pacific and Limited is the same as the local
currency. The gain or loss resulting from the translation of these two
subsidiaries' financial statements has been included as a separate component of
stockholders' equity.
The functional currency of Beijing is the U.S. dollar. Beijing, however,
maintains its books and records in the Renminbi. Therefore, the Company utilizes
the remeasurement method of foreign currency translation when Beijing is
consolidated. Any resulting remeasurement gain or loss is reported in the
Company's consolidated statements of operations.
The net foreign currency transaction loss in 1996, 1997, and 1998 was
$46,000, $183,000, and $177,000, respectively, and has been included in other
expenses in the accompanying statements of income (loss).
Revenue Recognition
The Company recognizes revenue upon shipment. The Company provides reserves
for uncollectible accounts receivable. These reserves totaled $455,000 and
$431,000 at December 31, 1997 and 1998, respectively. The Company performs
ongoing credit evaluations of all of its customers and considers various factors
in establishing its allowance for doubtful accounts.
Research and Technology
Research and technology costs are expensed as incurred. The Company
currently is spending research and technology dollars on several new
technologies that it plans to introduce in the future. There is a risk that some
or all of those technologies may not successfully make the transition from the
research and development lab to cost-effective manufacturable products.
Earnings (Loss) Per Share
During 1997, the Company adopted SFAS No. 128, Earnings per Share. Pursuant
to SFAS No. 128, basic earnings per common share are computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings (loss) per common share for the
years ended December 31, 1997 and 1998 and for the six months ended June 30,
1998 and 1999 are determined assuming that outstanding options were exercised at
the beginning of each year or at the time of issuance, if later. No outstanding
options were assumed to be exercised for purposes of calculating
F-10
<PAGE> 65
THREE-FIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
diluted earnings per share for the year ended December 31, 1996 as their effect
was anti-dilutive. Set forth below are the disclosures required pursuant to SFAS
No. 128:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- -----------------
1996 1997 1998 1998 1999
------- ------ ------ ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Basic earnings (loss) per share:
Income (loss) available to common
stockholders.............................. $(3,831) $5,243 $2,590 $2,118 $ 398
------- ------ ------ ------ ------
Weighted average common shares.............. 7,768 7,854 7,639 7,913 7,015
------- ------ ------ ------ ------
Basis per share amount................. $ (0.49) $ 0.67 $ 0.34 $ 0.27 $ 0.06
======= ====== ====== ====== ======
Diluted earnings (loss) per share:
Income (loss) available to common
stockholders.............................. $(3,831) $5,243 $2,590 $2,118 $ 398
------- ------ ------ ------ ------
Weighted average common shares.............. 7,768 7,854 7,639 7,913 7,015
Options assumed exercised................... -- 236 163 228 105
------- ------ ------ ------ ------
Total common shares plus assumed
exercises................................. 7,768 8,090 7,802 8,141 7,120
------- ------ ------ ------ ------
Diluted per share amount............... $ (0.49) $ 0.65 $ 0.33 $ 0.26 $ 0.06
======= ====== ====== ====== ======
</TABLE>
Recently Adopted Accounting Standards
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income, which requires companies to report all
changes in equity during a period, except those resulting from investment by
owners and distribution to owners, in a financial statement for the period in
which they are recognized. The Company has chosen to disclose Comprehensive
Income, which encompasses net income and foreign currency translation
adjustments, in the Consolidated Statement of Shareholder's Equity. Prior years
have been restated to conform to the SFAS No. 130 requirements.
Comprehensive Income (unaudited) was $2.1 million and $400,000 for the six
month periods ended June 30, 1998 and 1999, respectively.
In 1998, the Company also adopted Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information. The new rules establish revised standards for public companies
relating to the reporting of financial and descriptive information about their
operating segments in financial statements. The Company adopted SFAS No. 131 and
all of the required disclosures (Note 7).
F-11
<PAGE> 66
THREE-FIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
$15.0 million revolving line of credit, interest due
monthly at the bank's prime rate (7.75% at December
31, 1998) or at the LIBOR base rate (5.064% at
December 31, 1998) plus 1.75%, unpaid balance due
May 22, 2000, secured by all assets other than real
property........................................... $ -- $ -- $ 5,000
$10.0 million revolving line of credit/term loan,
interest due monthly at the bank's prime rate or at
the LIBOR base rate plus 2.375%, unpaid balance due
August 5, 2004, secured by all assets other than
real property...................................... -- 8,095 8,095
$350,000 United Kingdom credit facility, interest due
quarterly at the bank's base rate plus 2%, unpaid
balance due July 15, 1999, secured by United
Kingdom accounts receivable........................ -- -- --
-------- -------- --------
-- 8,095 13,095
Less current maturities.............................. -- (651) (6,461)
-------- -------- --------
$ -- $ 7,444 $ 6,634
======== ======== ========
</TABLE>
In November 1998, the Company entered into a new commitment from Imperial
Bank and the National Bank of Canada for a $25.0 million credit facility. This
new credit facility consists of (i) a $15.0 million revolving line of credit is
available for general corporate needs, and (ii) a $10.0 million term loan, which
provides available funds to repurchase a portion of the Company's common stock.
The amount of the term loan is available for advances until August 5, 1999,
followed by a five-year amortization period in which principal and interest will
be payable quarterly in equal installments. Advances under the term loan will be
made as either Prime Rate Advances, which accrue interest payable monthly, at
the bank's prime lending rate, or as LIBOR Rate Advances which bear interest at
237.5 basis points in excess of the LIBOR Base Rate. The credit facility is
secured by all of the Company's assets other than the Company's real property.
The Company must apply all proceeds from the sale of any treasury stock to the
outstanding principal balance of the term loan.
The credit facility contains restrictive covenants that include, among
other things, restrictions on the declaration or payment of dividends and the
amount of capital expenditures. The credit facility also requires the Company to
maintain a specified net worth, as defined, to maintain required debt to equity
ratio, and to maintain certain other financial ratios.
Any unpaid balance of the United Kingdom credit facility is due July 15,
2000, and is secured by United Kingdom accounts receivable.
(4) BENEFIT PLANS:
The Company has five stock option plans, the 1990 Stock Option Plan (1990
Plan), the 1993 Stock Option Plan (1993 Plan), the 1994 Non-Employee Directors
Stock Option Plan (1994 Plan), the 1997 Stock Option Plan (1997 Plan), and 1998
Stock Option Plan (1998 Plan).
F-12
<PAGE> 67
THREE-FIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1990 Stock Option Plan
Under the 1990 Plan, there were options issued but unexercised to purchase
163,100 shares as of December 31, 1998. In conjunction with stockholder approval
of the 1993 Plan, the Board terminated the 1990 Plan with respect to unissued
options to purchase 85,454 shares of common stock which remained and were
unissued as of the date the 1993 Plan was adopted. The exercise prices of
options are determined by the plan administrator, but may not be less than 100%
(110% if the option is granted to a stockholder who at the time the option is
granted owns stock representing more than 10% of the total combined voting power
of all classes of stock of the Company). The 1990 Plan will remain in force
through May 1, 2000.
The expiration date, maximum number of shares purchasable, and the other
provisions of the options granted under the 1990 Plan were established at the
time of grant. Options were granted for terms of up to ten years and become
exercisable in whole or in one or more installments at such times as were
determined by the Board of Directors upon grant of the options.
1993 Stock Option Plan
The 1993 Plan provides for the granting of options to purchase up to
385,454 shares of the Company's common stock (which includes 85,454 shares
previously reserved for issuance under the Company's 1990 Stock Option Plan),
the direct granting of common stock (stock awards), the granting of stock
appreciation rights (SARs) and the granting of other cash awards (cash awards;
stock awards, SARs, and cash awards are collectively referred to herein as
Awards). Under the 1993 Plan, options and Awards may be issued to key personnel
and others providing valuable services to the Company and its subsidiaries. The
options issued may be incentive stock options or nonqualified stock options. If
any option or SAR terminates or expires without having been exercised in full,
stock not issued under such option or SAR will again be available for grant
pursuant to the 1993 Plan. There were options outstanding to acquire 360,900
shares of the Company's common stock under the 1993 Plan at December 31, 1998.
To the extent that granted options are incentive stock options, the terms
and conditions of those options must be consistent with the qualification
requirement set forth in the Internal Revenue Code of 1986 (the "Code"). The
expiration date, maximum number of shares purchasable, and the other provisions
of the options will be established at the time of grant. Options may be granted
for terms of up to ten years and become exercisable in whole or in one or more
installments at such time as may be determined by the plan administrator upon
grant of the options. The exercise prices of options are determined by the plan
administrator, but may not be less than 100% (110% if the option is an incentive
stock option granted to a stockholder who at the time the option is granted owns
stock representing more than 10% of the total combined voting power of all
classes of stock of the Company) of the fair market value of the common stock at
the time of the grant. The 1993 Plan will remain in force until February 24,
2003.
1994 Non-Employee Directors Stock Option Plan
The 1994 Plan provides for the automatic grant of stock options to
non-employee directors to purchase up to 100,000 shares of the Company's common
stock. Under the 1994 Plan, options to acquire 500 shares of common stock will
be automatically granted to each non-employee director at the meeting of the
Board of Directors held immediately after each annual meeting of stockholders,
with such options to vest in a series of 12 equal and successive monthly
installments commencing one month after the annual automatic grant date. In
addition, each non-employee director serving on the Board of Directors on the
date the 1994 Plan was approved by the Company's stockholders received an
automatic grant of options to acquire 1,000 shares of common stock and each
subsequent newly elected non-employee member of the Board of Directors receives
an automatic grant of options to acquire 1,000 shares of common stock on the
date of their first appointment or election to the Board of Directors. Those
options become exercisable and
F-13
<PAGE> 68
THREE-FIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
vest in a series of three equal and successive annual installments, with the
first such installment becoming exercisable immediately after the director's
second successive election to the Board of Directors (the First Vesting Date),
the second installment becoming exercisable 10 months after the First Vesting
Date, and the third installment becoming exercisable 22 months after the First
Vesting Date (provided that the director has not ceased serving as a director
prior to a vesting date). A non-employee member of the Board of Directors is not
eligible to receive the 500 share automatic option grant if that option grant
date is within 30 days of such non-employee member receiving the 1,000 share
automatic option grant. The exercise price per share of common stock subject to
options granted under the 1994 Plan will be equal to 100% of the fair market
value of the Company's common stock on the date such options are granted. There
were outstanding options to acquire 11,000 shares of the Company's common stock
under the 1994 Plan at December 31, 1998.
1997 Stock Option Plan
The 1997 Plan provides for the granting of nonqualified options to purchase
up to 100,000 shares of the Company's common stock. Under the 1997 Plan, options
may be issued to key personnel and others providing valuable services to the
Company and its subsidiaries. The options issued will be nonqualified stock
options and shall not be incentive stock options as defined in Section 422 of
the Code. Any option that expires or terminates without having been exercised in
full will again be available for grant pursuant to the 1997 Plan. There were
options outstanding to acquire 38,300 shares of the Company's common stock under
the 1997 Plan at December 31, 1998.
The expiration date, maximum number of shares purchasable, and the other
provisions of the options will be established at the time of grant. Options may
be granted for terms of up to ten years and become exercisable in whole or in
one or more installments at such time as may be determined by the plan
administrator upon grant of the options. The exercise prices of the options are
determined by the plan administrator, but may not be less than 100% of the fair
market value of the common stock at the time of the grant. The 1997 Plan will
remain in force until May 12, 2007.
1998 Stock Option Plan
The 1998 Plan provides for the granting of incentive stock options and/or
nonqualified options to purchase up to 300,000 shares of the Company's common
stock. Under the 1998 Plan, options may be issued to key personnel and others
providing valuable services to the Company and its subsidiaries. The options
issued will be incentive stock options or nonqualified stock options as defined
in Section 422 of the Code. Any option that expires or terminates without having
been exercised in full will again be available for grant pursuant to the 1998
Plan. There were options outstanding to acquire 122,500 shares of the Company's
common stock under the 1998 Plan at December 31, 1998.
The expiration date, maximum number of shares purchasable, and the other
provisions of the options will be established at the time of grant. Options may
be granted for terms of up to ten years and become exercisable in whole or in
one or more installments at such time as may be determined by the plan
administrator upon grant of the options. The exercise prices of the options are
determined by the plan administrator, but may not be less than 100% of the fair
market value of the common stock at the time of the grant (110% if the option is
an incentive stock option granted to a stockholder who at the time the option is
granted owns stock representing more than 10% of the total combined voting power
of all classes of stock of the Company). The 1998 Plan will remain in force
until January 28, 2008.
Tax benefits from early disposition of common stock by optionees under the
1990 Plan and 1993 Plan and from the exercise of nonqualified options are
credited to additional paid-in capital.
F-14
<PAGE> 69
THREE-FIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company accounts for transactions with its employees pursuant
to Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with SFAS No. 123,
the Company's net income (loss) and earnings (loss) per share would have been as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------- ------ ------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss):
As reported...................................... $(3,831) $5,243 $2,590
Pro forma........................................ (4,076) 4,785 1,998
Basic earnings (loss) per share:
As reported...................................... $ (0.49) $ 0.67 $ 0.34
Pro forma........................................ (0.52) 0.61 0.26
Diluted earnings (loss) per share:
As reported...................................... $ (0.49) $ 0.65 $ 0.33
Pro forma........................................ (0.52) 0.59 0.26
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 1996, 1997, and 1998, respectively: risk-free interest
rates of 6.31%, 5.45%, and 4.52%; expected dividend yields of zero; expected
lives of 6.1, 6.4, and 6.6 years; and expected volatility (a measure of the
amount by which a price has fluctuated or is expected to fluctuate during a
period) of 61.9%, 60.0%, and 61.4%.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. The
weighted average fair value of shares exercised in 1998 was $14.03.
A summary of the status of the Company's five stock option plans at
December 31, 1996, 1997, and 1998 and changes during the years then ended, are
presented in the table and narrative below:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year... 539,576 $ 8.06 551,776 $ 6.92 550,970 $11.01
Granted............................ 250,100 11.89 200,500 14.63 334,800 13.87
Exercised.......................... (44,900) 0.49 (162,306) 1.34 (47,020) 1.08
Expired............................ (193,000) 18.04 (39,000) 12.23 (142,950) 15.45
-------- -------- --------
Outstanding at end of year......... 551,776 $ 6.92 550,970 $11.01 695,800 $12.14
======== ======== ========
Exercisable at end of year......... 294,982 165,110 226,731
======== ======== ========
Weighted average fair value of
options granted.................. $ 7.57 $ 9.19 $10.25
====== ====== ======
</TABLE>
F-15
<PAGE> 70
THREE-FIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------- -------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE
- --------------- -------------- ----------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 0.25-$9.00 85,100 4.1 years $ 2.46 63,600 $ 0.81
9.01-20.00 588,700 7.9 years 13.14 153,799 12.85
20.01-34.38 22,000 8.1 years 22.97 9,332 24.41
------- ------ ------- ------
695,800 7.5 years $12.14 226,731 $ 9.95
======= ====== ======= ======
</TABLE>
401(k) PROFIT SHARING PLAN
Effective September 1, 1990, the Company adopted a profit sharing plan
(401(k) Plan) pursuant to Section 401(k) of the Code. The 401(k) Plan covers
substantially all full-time employees who meet the eligibility requirements and
provides for a discretionary profit sharing contribution by the Company and an
employee elective contribution with a discretionary Company matching provision.
The Company expensed discretionary contributions pursuant to the 401(k) Plan in
the amount of $65,000, $71,000, and $100,000 for the years ended December 31,
1996, 1997, and 1998, respectively.
(5) INCOME TAXES:
SFAS No. 109, Accounting for Income Taxes, requires the use of an asset and
liability approach in accounting for income taxes. Deferred tax assets and
liabilities are recorded based on the differences between the financial
statement and tax bases of assets and liabilities and the tax rates in effect
when these differences are expected to reverse.
The provision (benefit) for income taxes for the years ended December 31
consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ------ ------
<S> <C> <C> <C>
Current, net of operating loss carryforwards and tax
credits utilized
Federal, net of tax benefit from early termination
of incentive stock options....................... $ 556 $ 356 $ (509)
State.............................................. 58 97 (24)
Foreign............................................ 9 71 237
------- ------ ------
623 524 (296)
Deferred provision (benefit)............................ (3,575) 2,769 2,069
Tax benefit from early termination of incentive stock
options, reflected in stockholders' equity............ 32 41 --
------- ------ ------
Provision (benefit) for income taxes.......... $(2,920) $3,334 $1,773
======= ====== ======
</TABLE>
In accordance with SFAS No. 109, a tax benefit for net operating losses of
approximately $102,000, $35,000, and $-0- and tax credits of approximately
$938,000, $-0-, and $-0- utilized in 1996, 1997, and 1998, respectively, are
included as a reduction of the current provision for income taxes in the
consolidated statements of income (loss).
F-16
<PAGE> 71
THREE-FIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of deferred taxes at December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Net long-term deferred tax liabilities:
Accelerated tax depreciation........................... $2,685 $3,156
Other.................................................. 33 --
------ ------
$2,718 $3,156
====== ======
Net short-term deferred tax assets:
Inventory reserve...................................... $1,721 $ 436
Uniform capitalization................................. 1,251 1,076
Accrued liabilities not currently deductible........... 1,080 1,022
Allowance for doubtful accounts........................ 156 156
Tax effect of regular U.S. net operating loss
carryforward.......................................... 12 --
Other.................................................. 91 (10)
------ ------
$4,311 $2,680
====== ======
</TABLE>
A reconciliation of the U.S. federal statutory rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate..................................... (34)% 34% 34%
Effect of state taxes...................................... (6) 5 3
Other...................................................... (3) -- 4
--- -- --
(43)% 39% 41%
=== == ==
</TABLE>
- -------------------------
(6) COMMITMENTS AND CONTINGENCIES:
In March 1995, the Company entered into a non-cancelable operating lease
for its primary manufacturing facility in Manila, the Philippines. The lease
expires December 31, 1999. In April 1995, the Company entered into a
non-cancelable operating lease for an additional manufacturing facility in
Manila, the Philippines. The lease expires March 31, 1999. The Company has an
option to extend the lease for an additional year at substantially the same
rates as the current lease.
Rent expense was approximately $477,000, $793,000, and $917,000 for the
years ended December 31, 1996, 1997, and 1998, respectively.
In April 1994, the Company entered into a ground lease (with purchase
options) on a 5.7 acre site in Tempe, Arizona. Annual lease payments under the
ground lease, which will expire on March 31, 2069, subject to renewal and
purchase options as well as termination provisions, will average approximately
$100,000 over the term of the lease subject to certain escalation provisions. A
design, manufacturing, and corporate headquarters facility containing
approximately 97,000 square feet was completed on the land in 1995 at a cost of
approximately $10.4 million.
F-17
<PAGE> 72
THREE-FIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's future lease commitments under the non-cancelable operating
leases as of December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999.................................................... $ 373
2000.................................................... 100
2001.................................................... 100
2002.................................................... 100
2003.................................................... 100
Thereafter.............................................. 6,525
------
$7,298
======
</TABLE>
The Company is involved in certain administrative proceedings arising in
the normal course of business. In the opinion of management, the Company's
potential exposure under the pending administrative proceedings is adequately
provided for in the accompanying financial statements.
(7) SEGMENT INFORMATION:
The Company offers advanced design and manufacturing services to a wide
range of original equipment manufacturers (OEMs). The majority of the Company's
sales are attributed to the LCD product line. The Company's products are
included in end-user devices for the following product categories: communication
devices, office, industrial, medical and commercial electronics.
Management monitors and evaluates the financial performance of the
Company's operations by its four operating segments located throughout the
world. These segments consist of three manufacturing operations, located in the
United States, China, and the Philippines, and a sales and distribution
operation in the United Kingdom.
The following operating segment information includes financial information
(in thousands) for all four of the Company's operating segments. Financial
information for the China operation is presented beginning from the date those
operations commenced, June 1998.
<TABLE>
<CAPTION>
UNITED UNITED
STATES KINGDOM CHINA PHILIPPINES ELIMINATIONS TOTAL
------- ------- ------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
Net sales................................................. $58,709 $27,814 $ -- $1,494 $(27,304) $60,713
Income (loss) before provision for (benefit from) income
taxes................................................... (6,935) 28 -- 12 144 (6,751)
Provision for (benefit from) income taxes................. (2,929) 9 -- -- -- (2,920)
Depreciation.............................................. 3,375 8 -- 57 -- 3,440
Total assets.............................................. 58,828 3,824 -- 288 (371) 62,569
Capital expenditures...................................... 856 42 -- 50 -- 948
</TABLE>
<TABLE>
<CAPTION>
UNITED UNITED
STATES KINGDOM CHINA PHILIPPINES ELIMINATIONS TOTAL
------- ------- ------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Net sales................................................. $83,023 $10,755 $ -- $3,107 $(12,243) $84,642
Income before provision for income taxes.................. 7,990 436 -- 104 47 8,577
Provision for income taxes................................ 3,263 32 -- 39 -- 3,334
</TABLE>
F-18
<PAGE> 73
THREE-FIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
UNITED UNITED
STATES KINGDOM CHINA PHILIPPINES ELIMINATIONS TOTAL
------- ------- ------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Depreciation.............................................. 4,058 27 -- 9 -- 4,094
Total assets.............................................. 68,039 4,896 -- 354 (454) 72,835
Capital expenditures...................................... 3,036 14 -- -- -- 3,050
</TABLE>
<TABLE>
<CAPTION>
UNITED UNITED
STATES KINGDOM CHINA PHILIPPINES ELIMINATIONS TOTAL
------- ------- ------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Net sales................................................. $92,251 $33,438 $ 7,205 $3,010 $(40,857) $95,047
Income (loss) before provision for (benefit from) income
taxes................................................... 4,643 676 (947) (2) (7) 4,363
Provision for income taxes................................ 1,537 209 -- 27 -- 1,773
Depreciation.............................................. 4,408 36 168 41 -- 4,653
Total assets.............................................. 60,514 9,195 12,301 642 (4,748) 77,904
Capital expenditures...................................... 2,809 10 5,298 2 -- 8,119
</TABLE>
<TABLE>
<CAPTION>
UNITED UNITED
STATES KINGDOM CHINA PHILIPPINES ELIMINATIONS TOTAL
------- ------- ------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
Net sales................................................. $30,070 $11,091 $ -- $ -- $ -- $41,161
Intersegment sales........................................ 11,212 -- -- 1,325 (12,537) --
Income (loss) before provision for (benefit from) income
taxes................................................... 3,636 397 (382) 37 (37) 3,651
</TABLE>
<TABLE>
<CAPTION>
UNITED UNITED
STATES KINGDOM CHINA PHILIPPINES ELIMINATIONS TOTAL
------- ------- ------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
Net sales................................................. $17,483 $24,576 $12,585 $ -- $ -- $54,644
Intersegment sales........................................ 33,518 -- 3,839 1,595 (38,952) --
Income (loss) before provision for (benefit from) income
taxes................................................... (609) 382 349 31 27 180
</TABLE>
Net sales are generated from the sale of LCD display devices, which are
applied in several different end-use products. Total net sales by these product
categories are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cellular telephones and other wireless communication
devices............................................. $40,360 $31,415 $62,073
Office automation equipment........................... 5,979 33,528 12,658
Other................................................. 14,374 19,699 20,316
------- ------- -------
Total............................................ $60,713 $84,642 $95,047
======= ======= =======
</TABLE>
The Company's strategy involves concentrating its efforts on providing
design and production services to leading companies in a limited number of
fast-growing industries. The Company has been undertaking substantial efforts to
diversify its business, broaden its customer base, and expand its markets. The
Company's historical major customer, that accounted for approximately 65% and
35% of the Company's net sales in 1996 and 1997, respectively, accounted for
approximately 64% of the Company's net sales during 1998. This increased
percentage occurred as a result of increased sales to that customer as well as
decreased sales to other customers. The Company's other significant customer
accounted for less than 10% of the Company's net sales during 1996. Sales to
this customer were 32% of the Company's net sales during 1997 and less than 10%
of the Company's net sales during 1998.
F-19
<PAGE> 74
THREE-FIVE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The significant amount of sales to a few customers results in certain
concentrations of credit risk for the Company. The Company's accounts receivable
balance, including the accounts receivable of the Company's largest customers,
is comprised of a large number of customers, primarily in the cellular
telephone, computer hardware, and other electronic products industries. These
customers are located primarily in the United States and Europe.
F-20
<PAGE> 75
Inside Back Cover
Top: (Heading) World Class High-Volume Manufacturing; beneath the heading are
subheadings and text, in bullet point form. The subheadings and text read,
"Tempe, Arizona: LCD/microdisplay manufacturing; High-volume automated LCD
manufacturing line; State of the art cleanroom facility; Design, research, and
technology center; Total Quality Management; Manila, The Philippines: Display
module manufacturing/assembly; ISO 9002 certified; Highly trained work force;
Advanced manufacturing techniques; Capacity: approximately 14 million modules
per year; Beijing, China: Display module manufacturing/assembly; Positioned for
emerging growth markets; Extensive cleanroom facility; Cost effective
labor; Capacity: approximately 12 million modules per year"
Right-margin: Three pictures of assembly lines from the three manufacturing
facilities.
<PAGE> 76
- ------------------------------------------------------
- ------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT, AND THE UNDERWRITERS HAVE NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE
YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT, AND THE
UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION IN THIS
DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
Cautionary Statement Regarding
Forward-Looking Statements.......... 15
Use of Proceeds....................... 15
Price Range of Common Stock........... 16
Dividend Policy....................... 16
Capitalization........................ 17
Selected Consolidated Financial
Information......................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 31
Management............................ 44
Principal and Selling Stockholders.... 47
Underwriting.......................... 48
Legal Matters......................... 49
Experts............................... 49
Where You Can Find More Information... 49
Incorporation of Certain Documents by
Reference........................... 50
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,300,000 Shares
[THREE-FIVE SYSTEMS LOGO]
------------------------
Prospectus
, 1999
------------------------
Needham & Company, Inc.
ING Barings
J.C. Bradford & Co.
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the offering
described in the Registration Statement. All such expenses are estimates except
for the SEC registration fee and NASD and New York Stock Exchange filing fees.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 14,155
--------
NYSE filing fee............................................. 2,000
--------
Blue Sky fees and expenses.................................. 5,000
--------
NASD fee.................................................... 4,758
--------
Transfer agent and registrar fees........................... 3,000
--------
Accountants' fees and expenses.............................. 30,000
Legal fees and expenses..................................... 200,000
--------
Printing and engraving expenses............................. 81,500
--------
Miscellaneous fees.......................................... 19,587
--------
Total....................................................... $360,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Restated Certificate of Incorporation and Bylaws of the Registrant
provide that the Registrant will indemnify and advance expenses, to the fullest
extent permitted by the Delaware General Corporation Law, to each person who is
or was a director or officer of the Registrant, or who serves or served any
other enterprise or organization at the request of the Registrant (an
"Indemnitee").
Under Delaware law, to the extent that an Indemnitee is successful on the
merits in defense of a suit or proceeding brought against him or her by reason
of the fact that he or she is or was a director, officer, or agent of the
Registrant, or serves or served any other enterprise or organization at the
request of the Registrant, the Registrant shall indemnify him or her against
expenses (including attorneys' fees) actually and reasonably incurred in
connection with such action.
If unsuccessful in defense of a third-party civil suit or a criminal suit,
or if such a suit is settled, an Indemnitee may be indemnified under Delaware
law against both (i) expenses, including attorneys' fees, and (ii) judgments,
fines, and amounts paid in settlement if he or she acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the Registrant, and, with respect to any criminal action, had no
reasonable cause to believe his or her conduct was unlawful.
If unsuccessful in defense of a suit brought by or in the right of the
Registrant, where the suit is settled, an Indemnitee may be indemnified under
Delaware law only against expenses (including attorneys' fees) actually and
reasonably incurred in the defense or settlement of the suit if he or she acted
in good faith and in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the Registrant except that if the Indemnitee
is adjudged to be liable for negligence or misconduct in the performance of his
or her duty to the Registrant, he or she cannot be made whole even for expenses
unless a court determines that he or she is fully and reasonably entitled to
indemnification for such expenses.
Also under Delaware law, expenses incurred by an officer or director in
defending a civil or criminal action, suit, or proceeding may be paid by the
Registrant in advance of the final disposition of the suit, action, or
proceeding upon receipt of an undertaking by or on behalf of the officer or
director to repay such
II-1
<PAGE> 78
amount if it is ultimately determined that he or she is not entitled to be
indemnified by the Registrant. The Registrant may also advance expenses incurred
by other employees and agents of the Registrant upon such terms and conditions,
if any, that the board of directors of the Registrant deems appropriate.
ITEM 16. EXHIBITS.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------ --------
<C> <S>
1 Underwriting Agreement
2 Amended and Restated Agreement and Plan of Reorganization(1)
3(a) Restated Certificate of Incorporation of the Registrant(2)
*3(b) Bylaws of the Company
*4 Specimen Stock Certificate
5 Opinion of Greenberg Traurig, P.A.
23(a) Consent of Greenberg Traurig, P.A. (included in its Opinion
filed as Exhibit 5)
23(b) Consent of Arthur Andersen LLP
*24 Power of Attorney of Directors and Executive Officers
(previously included on the signature page of this
Registration Statement)
*27 Financial Data Schedule
</TABLE>
- ------------
* Previously filed.
(1) Incorporated by reference to the Registration Statement on Form S-4 of TF
Consolidation, Inc. (Registration No. 33-33944) as filed March 27, 1990 and
declared effective March 27, 1990.
(2) Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended March 31, 1994, as filed with the Commission on or about May 12, 1994.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted on the basis of immateriality or
because such schedules are not otherwise applicable.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
II-2
<PAGE> 79
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) that for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1), or (4), or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) that for purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Phoenix, State of
Arizona, on August 25, 1999.
THREE-FIVE SYSTEMS, INC.
By: /s/ JEFFREY D. BUCHANAN
------------------------------------
Jeffrey D. Buchanan
Executive Vice President
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JACK L. SALTICH* President, Chief Executive August 25, 1999
- --------------------------------------------------- Officer, and Director
Jack L. Saltich (Principal Executive Officer)
/s/ JEFFREY D. BUCHANAN Executive Vice August 25, 1999
- --------------------------------------------------- President -- Finance,
Jeffrey D. Buchanan Administration, and Legal;
Chief Financial Officer;
Secretary; Treasurer; and
Director (Principal Financial
Officer)
/s/ ROBERT T. BERUBE* Corporate Controller (Principal August 25, 1999
- --------------------------------------------------- Accounting Officer)
Robert T. Berube
/s/ DAVID C. MALMBERG* Chairman of the Board August 25, 1999
- ---------------------------------------------------
David C. Malmberg
/s/ GARY R. LONG* Director August 25, 1999
- ---------------------------------------------------
Gary R. Long
/s/ KENNETH M. JULIEN* Director August 25, 1999
- ---------------------------------------------------
Kenneth M. Julien
/s/ THOMAS H. WERNER* Director August 25, 1999
- ---------------------------------------------------
Thomas H. Werner
*By: /s/ JEFFREY D. BUCHANAN
---------------------------------------------
Jeffrey D. Buchanan
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 81
[ARTHUR ANDERSEN LLP LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Three-Five Systems, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of THREE-FIVE SYSTEMS, INC. and subsidiaries included in
this registration statement and have issued our report thereon dated January 22,
1999. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule shown on page S-2 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
January 22, 1999.
S-1
<PAGE> 82
THREE-FIVE SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS OTHER PERIOD
---------- ---------- ---------- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts and sales
returns and allowances:
Year ended 12/31/96................. $ 602 14 33(1) -- $ 649
Year ended 12/31/97................. 649 (105) 36(1) -- 580
Year ended 12/31/98................. 580 (24) (40)(1) -- 516
Inventory Reserve:
Year ended 12/31/96................. $2,767 5,939 142(2) (2,066)(3) $6,782
Year ended 12/31/97................. 6,782 1,114 -- (3,587)(3) 4,309
Year ended 12/31/98................. 4,309 (1,660) -- (1,524)(3) 1,125
</TABLE>
- ------------
(1) Actual return activity
(2) Inventory adjustments
(3) Obsolete inventory written off
S-2
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------ --------
<C> <S>
1 Underwriting Agreement
2 Amended and Restated Agreement and Plan of Reorganization(1)
3(a) Restated Certificate of Incorporation of the Registrant(2)
*3(b) Bylaws of the Company
*4 Specimen Stock Certificate
5 Opinion of Greenberg Traurig, P.A.
23(a) Consent of Greenberg Traurig, P.A. (included in its Opinion
filed as Exhibit 5)
23(b) Consent of Arthur Andersen LLP
*24 Power of Attorney of Directors and Executive Officers
(previously included on the signature page of this
Registration Statement)
*27 Financial Data Schedule
</TABLE>
- ------------
* Previously filed.
(1) Incorporated by reference to the Registration Statement on Form S-4 of TF
Consolidation, Inc. (Registration No. 33-33944) as filed March 27, 1990 and
declared effective March 27, 1990.
(2) Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended March 31, 1994, as filed with the Commission on or about May 12, 1994.
<PAGE> 1
EXHIBIT 1
_________ SHARES*
THREE-FIVE SYSTEMS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
, 1999
Needham & Company, Inc.
ING Barings
J.C. Bradford & Co.
As Representatives of the several Underwriters
c/o Needham & Company, Inc.
445 Park Avenue
New York, New York 10022
Ladies and Gentlemen:
Three-Five Systems, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell ________ shares (the "Company Firm Shares") of the
Company's Common Stock, $0.01 par value per share (the "Common Stock"), and
David Buchanan (the "Selling Stockholder") proposes to sell ___________ shares
of Common Stock (the "Selling Stockholder Shares" and, with the Company Firm
Shares, the "Firm Shares"), in each case to you and to the several other
Underwriters named in Schedule I hereto (collectively, the "Underwriters"), for
whom you are acting as representatives (the "Representatives"). The Company has
also agreed to grant to you and the other Underwriters an option (the "Option")
to purchase up to an additional ______ shares of Common Stock, on the terms and
for the purposes set forth in
* Plus an option to purchase up to an additional ____ shares to cover
over-allotments.
1
<PAGE> 2
Section 1(b) (the "Option Shares"). The Firm Shares and the Option Shares are
referred to collectively herein as the "Shares."
The Company and the Selling Stockholder confirm as follows their
respective agreements with the Representatives and the several other
Underwriters.
2
<PAGE> 3
1. Agreement to Sell and Purchase.
(a) On the basis of the representations, warranties and agreements
of the Company and the Selling Stockholder herein contained and subject to all
the terms and conditions of this Agreement, (i) the Company agrees to issue and
sell the Company Firm Shares to the several Underwriters, (ii) the Selling
Stockholder agrees to sell the Selling Stockholder Shares to the several
Underwriters, and (iii) each of the Underwriters, severally and not jointly,
agrees to purchase from the Company and the Selling Stockholder the aggregate
number of Firm Shares set forth opposite the respective Underwriter's name in
Schedule I hereto, at the purchase price of $____ for each Firm Share. The
percentage of Firm Shares each Underwriter shall purchase from the Company and
the Selling Stockholder shall equal, as nearly as is practicable, the percentage
that such Underwriter is purchasing of all Firm Shares to be sold hereunder.
(b) Subject to all the terms and conditions of this Agreement, the
Company grants the Option to the several Underwriters to purchase, severally and
not jointly, up to ________ Option Shares at the same price per share as the
Underwriters shall pay for the Firm Shares. The Option may be exercised only to
cover over-allotments in the sale of the Firm Shares by the Underwriters and may
be exercised in whole or in part at any time (but not more than once) on or
before the 30th day after the date of this Agreement upon written or telegraphic
notice (the "Option Shares Notice") by the Representatives to the Company no
later than 12:00 noon, New York City time, at least two and no more than five
business days before the date specified for closing in the Option Shares Notice
(the "Option Closing Date"), setting forth the aggregate number of Option Shares
to be purchased and the time and date for such purchase. On the Option Closing
Date, the Company will issue and sell to the Underwriters the number of Option
Shares set forth in the Option Shares Notice, and each Underwriter will purchase
such percentage of the Option Shares as is equal to the percentage of Firm
Shares that such Underwriter is purchasing, as adjusted by the Representatives
in such manner as they deem advisable to avoid fractional shares.
2. Delivery and Payment. Delivery of the Firm Shares shall be made to
the Representatives for the accounts of the Underwriters against payment of the
purchase price by certified or official bank checks or by wire transfer payable
in same-day funds to the order of the Company at the office of Needham &
Company, Inc., 445 Park Avenue, New York, New York 10022, at 10:00 a.m., New
York City time, on the third (or, if the purchase price set forth in Section
1(b) hereof is determined after 4:30 p.m., Washington D.C. time, the fourth)
business day following the commencement of the offering contemplated by this
Agreement, or at such time on such other date, not later than seven business
days after the date of this Agreement, as may be agreed upon by the Company and
the Representatives (such date is hereinafter referred to as the "Closing
Date").
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
3
<PAGE> 4
Certificates evidencing the Shares shall be in definitive form and
shall be registered in such names and in such denominations as the
Representatives shall request at least two business days prior to the Closing
Date or the Option Closing Date, as the case may be, by written notice to the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at least 24 hours prior to the Closing Date or the
Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in connection with the
issuance and delivery of the Firm Shares and Option Shares by the Company to the
respective Underwriters shall be borne by the Company. The Company will pay and
save each Underwriter and any subsequent holder of the Shares harmless from any
and all liabilities with respect to or resulting from any failure or delay in
paying Federal and state stamp and other transfer taxes, if any, which may be
payable or determined to be payable in connection with the original issuance or
sale to such Underwriter of the Shares.
3. Representations and Warranties.
(a) The Company represents, warrants and covenants to each
Underwriter that:
(i) The Company meets the requirements for use of Form S-3 and a
registration statement (Registration No. 333- ) on Form S-3 relating to the
Shares, including a preliminary prospectus and such amendments to such
registration statement as may have been required to the date of this Agreement,
has been prepared by the Company under the provisions of the Securities Act of
1933, as amended (the "Act"), and the rules and regulations (collectively
referred to as the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder, and has been filed with the
Commission. The term "preliminary prospectus" as used herein means a preliminary
prospectus, including the documents incorporated by reference therein, as
contemplated by Rule 430 or Rule 430A of the Rules and Regulations included at
any time as part of the registration statement. Copies of such registration
statement and amendments and of each related preliminary prospectus have been
delivered to the Representatives. If such registration statement has not become
effective, a further amendment to such registration statement, including a form
of final prospectus, necessary to permit such registration statement to become
effective will be filed promptly by the Company with the Commission. If such
registration statement has become effective, a final prospectus containing
information permitted to be omitted at the time of effectiveness by Rule 430A of
the Rules and Regulations will be filed promptly by the Company with the
Commission in accordance with Rule 424(b) of the Rules and Regulations. The term
"Registration Statement" means the registration statement as amended at the time
it becomes or became effective (the "Effective Date"), including all documents
incorporated by reference therein, financial statements and all exhibits and any
information deemed to be included by Rule 430A and includes any registration
statement relating to the offering contemplated by this Agreement and filed
pursuant to Rule 462(b) of the Rules and Regulations. The term "Prospectus"
means the prospectus, including the documents incorporated by reference therein,
as first filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations or, if no such filing is required, the form of final prospectus,
including the documents incorporated by reference
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<PAGE> 5
therein, included in the Registration Statement at the Effective Date.
Any reference herein to the terms "amend," "amendment" or "supplement" with
respect to the Registration Statement, any preliminary prospectus or the
Prospectus shall be deemed to refer to and include the filing of any document
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") after
the Effective Date, the date of any preliminary prospectus or the date of the
Prospectus, as the case may be, and deemed to be incorporated therein by
reference.
(ii) No order preventing or suspending the use of any preliminary
prospectus has been issued by the Commission. On the Effective Date, the date
the Prospectus is first filed with the Commission pursuant to Rule 424(b) (if
required), at all times subsequent to and including the Closing Date and, if
later, the Option Closing Date and when any post-effective amendment to the
Registration Statement becomes effective or any amendment or supplement to the
Prospectus is filed with the Commission, the Registration Statement and the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment or supplement thereto), including the financial
statements included in the Prospectus, did and will comply with all applicable
provisions of the Act, the Exchange Act, the rules and regulations under the
Exchange Act (the "Exchange Act Rules and Regulations"), and the Rules and
Regulations and will contain all statements required to be stated therein in
accordance with the Act, the Exchange Act, the Exchange Act Rules and
Regulations, and the Rules and Regulations. On the Effective Date and when any
post-effective amendment to the Registration Statement becomes effective, no
part of the Registration Statement, the Prospectus or any such amendment or
supplement did or will contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading. At the Effective Date, the date the
Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission and at the Closing Date and, if later, the Option Closing Date, the
Prospectus did not and will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
foregoing representations and warranties in this Section 3(a)(ii) do not apply
to any statements or omissions made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. The Company acknowledges that
the statements set forth under the heading "Underwriting" in the Prospectus
constitute the only information relating to any Underwriter furnished in writing
to the Company by the Representatives specifically for inclusion in the
Registration Statement.
(iii) The documents that are incorporated by reference in the
preliminary prospectus and the Prospectus or from which information is so
incorporated by reference, when they became or become effective or were or are
filed with the Commission, as the case may be, complied or will comply in all
material respects with the requirements of the Act or the Exchange Act, as
applicable, and the Rules and Regulations or the Exchange Act Rules and
Regulations, as applicable; and any documents so filed and incorporated by
reference subsequent to the Effective Date shall, when they are filed with the
Commission, comply in all material respects with the requirements of the Act or
the Exchange Act, as applicable, and the Rules and Regulations or the Exchange
Act Rules and Regulations, as applicable.
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<PAGE> 6
(iv) The Company does not own, and at the Closing Date and, if
later, the Option Closing Date, will not own, directly or indirectly, any shares
of stock or any other equity or long-term debt securities of any corporation or
have any equity interest in any corporation, firm, partnership, joint venture,
association or other entity, other than the subsidiaries listed in Exhibit 21 to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998 (the "Subsidiaries"). The Company and each of its Subsidiaries is, and at
the Closing Date and, if later, the Option Closing Date, will be, a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation (except where the failure of any Subsidiary to be
in good standing has not had and will not have a material adverse effect on the
Company or any of its Subsidiaries). The Company and each of its Subsidiaries
has, and at the Closing Date and, if later, the Option Closing Date, will have,
full power and authority to conduct all the activities conducted by it, to own
or lease all the assets owned or leased by it and to conduct its business as
described in the Registration Statement and the Prospectus. The Company and each
of its Subsidiaries is, and at the Closing Date and, if later, the Option
Closing Date, will be, duly licensed or qualified to do business and in good
standing as a foreign corporation in all jurisdictions in which the nature of
the activities conducted by it or the character of the assets owned or leased by
it makes such license or qualification necessary, except to the extent that the
failure to be so qualified or be in good standing would not materially and
adversely affect the Company or its business, properties, business prospects,
condition (financial or other) or results of operations. All of the outstanding
shares of capital stock of each Subsidiary have been duly authorized and validly
issued and are fully paid and nonassessable, and owned by the Company free and
clear of all claims, liens, charges and encumbrances; there are no securities
outstanding that are convertible into or exercisable or exchangeable for capital
stock of any Subsidiary. The Company is not, and at the Closing Date and, if
later, the Option Closing Date, will not be, engaged in any discussions or a
party to any agreement or understanding, written or oral, regarding the
acquisition of an interest in any corporation, firm, partnership, joint venture,
association or other entity where such discussions, agreements or understandings
would require amendment to the Registration Statement pursuant to applicable
securities laws. Complete and correct copies of the certificate of incorporation
and of the by-laws of the Company and the charter documents of each of its
Subsidiaries and all amendments thereto have been delivered to the
Representatives, and no changes therein will be made subsequent to the date
hereof and prior to the Closing Date or, if later, the Option Closing Date.
(v) All of the outstanding shares of capital stock of the
Company, including the shares to be sold by the Selling Stockholder, have been
duly authorized, validly issued and are fully paid and nonassessable and were
issued in compliance with all applicable state and federal securities laws; the
Shares to be sold by the Company have been duly authorized and when issued and
paid for as contemplated herein will be validly issued, fully paid and
nonassessable; no preemptive or similar rights exist with respect to any of the
Shares or the issue and sale thereof . The description of the capital stock of
the Company in the Registration Statement and the Prospectus is, and at the
Closing Date and, if later, the Option Closing Date, will be, complete and
accurate in all respects. Except as set forth in the Prospectus, the Company
does not have outstanding, and at the Closing Date and, if later, the Option
Closing Date, will not have outstanding, any options to purchase, or any rights
or warrants to subscribe for, or any securities or obligations convertible into,
or any contracts or commitments to issue or
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<PAGE> 7
sell, any shares of capital stock, or any such warrants, convertible securities
or obligations. No further approval or authority of stockholders or the Board of
Directors of the Company will be required for the issuance and sale of the
Shares as contemplated herein.
(vi) The financial statements and schedules included or
incorporated by reference in the Registration Statement or the Prospectus
present fairly the financial condition of the Company and its consolidated
Subsidiaries as of the respective dates thereof and the results of operations
and cash flows of the Company and its consolidated Subsidiaries for the
respective periods covered thereby, all in conformity with generally accepted
accounting principles applied on a consistent basis throughout the entire period
involved, except as otherwise disclosed in the Prospectus. No other financial
statements or schedules of the Company are required by the Act, the Exchange
Act, the Exchange Act Rules and Regulations or the Rules and Regulations to be
included in the Registration Statement or the Prospectus. Arthur Andersen LLP
(the "Accountants"), who have reported on such financial statements and
schedules, are independent accountants with respect to the Company as required
by the Act and the Rules and Regulations. The summary consolidated financial and
statistical data included in the Registration Statement present fairly the
information shown therein and have been compiled on a basis consistent with the
financial statements presented therein.
(vii) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus and prior to the
Closing Date and, if later, the Option Closing Date, except as set forth in or
contemplated by the Registration Statement and the Prospectus, (A) there has not
been and will not have been any change in the capitalization of the Company
(other than in connection with the exercise of options to purchase the Company's
Common Stock granted pursuant to the Company's stock option plans from the
shares reserved therefor as described in the Registration Statement), or any
material adverse change in the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company or
any of its Subsidiaries, singly or taken as a whole, arising for any reason
whatsoever, (B) neither the Company nor any of its Subsidiaries, singly or taken
as a whole, has incurred nor will any of them incur, except in the ordinary
course of business as described in the Prospectus, any material liabilities or
obligations, direct or contingent, nor has the Company or any of its
Subsidiaries entered into nor will it enter into, except in the ordinary course
of business as described in the Prospectus, any material transactions other than
pursuant to this Agreement and the transactions referred to herein and (C) the
Company has not and will not have paid or declared any dividends or other
distributions of any kind on any class of its capital stock.
(viii) The Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its business in
a manner that would cause it to become, an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act of
1940, as amended.
(ix) Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company or its
Subsidiaries or any of their officers
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<PAGE> 8
in their capacity as such, nor any basis therefor, before or by any Federal or
state court, commission, regulatory body, administrative agency or other
governmental body, domestic or foreign, wherein an unfavorable ruling, decision
or finding might materially and adversely affect the Company and any of its
Subsidiaries, singly or taken as a whole, or the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company and any of its Subsidiaries, singly or taken as a whole.
(x) The Company and each Subsidiary has, and at the Closing Date
and, if later, the Option Closing Date, will have, performed all the obligations
required to be performed by it, and is not, and at the Closing Date, and, if
later, the Option Closing Date, will not be, in default, under any contract or
other instrument to which it is a party or by which its property is bound or
affected, which default might materially and adversely affect the Company and
any of its Subsidiaries, singly or taken as a whole, or the business,
properties, business prospects, condition (financial or other) or results of
operations of the Company and any of its Subsidiaries, singly or taken as a
whole. To the best knowledge of the Company, no other party under any contract
or other instrument to which it and any of its Subsidiaries is a party is in
default in any respect thereunder, which default might materially and adversely
affect the Company and any of its Subsidiaries, singly or taken as a whole, or
the business, properties, business prospects, condition (financial or other) or
results of operations of the Company and any of its Subsidiaries, singly or
taken as a whole. Neither the Company nor any of its Subsidiaries is, and at the
Closing Date and, if later, the Option Closing Date, will be, in violation of
any provision of their respective certificates or articles of organization or
by-laws or other organizational documents.
(xi) No consent, approval, authorization or order of, or any
filing or declaration with, any court or governmental agency or body is required
for the consummation by the Company of the transactions on its part contemplated
herein, except such as have been obtained under the Act or the Rules and
Regulations and such as may be required under state securities or Blue Sky laws
or the by-laws and rules of the National Association of Securities Dealers, Inc.
(the "NASD") in connection with the purchase and distribution by the
Underwriters of the Shares.
(xii) The Company has full corporate power and authority to enter
into this Agreement. This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding agreement of the
Company, enforceable against the Company in accordance with the terms hereof
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, or other laws affecting creditors' rights generally or by general
principles of equity and except as rights to indemnity or contribution may be
limited by federal or state securities laws and the public policy underlying
such laws). The performance of this Agreement and the consummation of the
transactions contemplated hereby will not result in the creation or imposition
of any lien, charge or encumbrance upon any of the assets of the Company
pursuant to the terms or provisions of, or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, or give any
party a right to terminate any of its obligations under, or result in the
acceleration of any obligation under, the certificate or articles of
incorporation or by-laws or other organizational documents of the Company or any
of its Subsidiaries, any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement,
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<PAGE> 9
bond, debenture, note agreement or other evidence of indebtedness, lease,
contract or other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company, any of its Subsidiaries or any
of their properties is bound or affected, or violate or conflict with any
judgment, ruling, decree, order, statute, rule or regulation of any court or
other governmental agency or body applicable to the business or properties of
the Company or any of its Subsidiaries.
(xiii) The Company or one of its Subsidiaries has good and
marketable title to all properties and assets described in the Prospectus as
owned by them, free and clear of all liens (except for liens for taxes not yet
due and payable as to which appropriate reserves have been established and
reflected on the Company's financial statements), charges, encumbrances or
restrictions, except such as are described in the Prospectus or are not material
to the business of the Company or its Subsidiaries. The Company or its
Subsidiaries have valid, subsisting and enforceable leases for the properties
described in the Prospectus as leased by them. The Company or one of its
Subsidiaries owns or leases all such properties as are necessary to its
operations as now conducted or as proposed to be conducted, except where the
failure to so own or lease would not materially and adversely affect the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company and its Subsidiaries, singly or taken as a
whole.
(xiv) There is no document or contract of a character required to
be described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement which is not described or filed as
required. All such contracts to which the Company or any of its Subsidiaries is
a party have been duly authorized, executed and delivered by the Company or such
Subsidiary, constitute valid and binding agreements of the Company or such
Subsidiary and are enforceable against and by the Company or such Subsidiary in
accordance with the terms thereof (except as such enforceability may be limited
by applicable bankruptcy, insolvency, or other laws affecting creditors' rights
generally or by general principles of equity and except as rights to indemnity
or contribution may be limited by federal or state securities laws and the
public policy underlying such laws).
(xv) No statement, representation, warranty or covenant made by
the Company in this Agreement or made in any certificate or document required by
Section 4 of this Agreement to be delivered to the Representatives was or will
be, when made, inaccurate, untrue or incorrect.
(xvi) Neither the Company nor any of its directors, officers or
controlling persons has taken, directly or indirectly, any action designed, or
which might reasonably be expected, to cause or result, under the Act or
otherwise, in, or which has constituted, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Shares.
(xvii) No holder of securities of the Company has rights to the
registration of any securities of the Company because of the filing of the
Registration Statement, which rights have not been waived by the holder thereof
as of the date hereof.
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<PAGE> 10
(xviii) The Company has filed an application to list the Shares
on the New York Stock Exchange ("NYSE"), and has received notification that the
listing has been approved, subject to notice of issuance of the Shares.
(xix) Except as disclosed in or specifically contemplated by the
Prospectus (A) the Company and its Subsidiaries have sufficient trademarks,
trade names, patent rights, mask works, copyrights, licenses, approvals and
governmental authorizations to conduct their businesses as now conducted, (B)
the Company has no knowledge of any infringement by it or any of its
Subsidiaries of trademarks, trade name rights, patent rights, mask work rights,
copyrights, licenses, trade secrets or other similar rights of others, where
such infringement could have a material and adverse effect on the Company, any
of its Subsidiaries or the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company and any of its
Subsidiaries, singly or taken as a whole, and (C) there is no claim being made
against the Company or any of its Subsidiaries, or to the best of the Company's
knowledge, any employee of the Company or any of its Subsidiaries, regarding
trademark, trade name, patent, mask work, copyright, license, trade secret or
other infringement which could have a material and adverse effect on the
Company, any of its Subsidiaries or the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company and any of its Subsidiaries, singly or taken as a whole.
(xx) The Company and each of its Subsidiaries have filed all
federal, state, local and foreign income tax returns which have been required to
be filed and has paid all taxes and assessments received by it to the extent
that such taxes or assessments have become due. Neither the Company nor any of
its Subsidiaries have any tax deficiency which has been or, to the best
knowledge of the Company, might be asserted or threatened against it which could
have a material and adverse effect on the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company and its Subsidiaries, singly or taken as a whole.
(xxi) The Company or its Subsidiaries owns or possesses all
authorizations, approvals, orders, licenses, registrations, other certificates
and permits of and from all governmental regulatory officials and bodies,
necessary to conduct their respective businesses as contemplated in the
Prospectus, except where the failure to own or possess such authorizations,
approvals, orders, licenses, registrations, other certificates and permits would
not materially and adversely affect the Company, any of its Subsidiaries or the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company and any of its Subsidiaries, singly or
taken as a whole. There is no proceeding pending or threatened (or any basis
therefor known to the Company) which may cause any such authorization, approval,
order, license, registration, certificate or permit to be revoked, withdrawn,
cancelled, suspended or not renewed; and the Company and each of its
Subsidiaries is conducting its business in compliance with all laws, rules and
regulations applicable thereto (including, without limitation, all applicable
federal, state and local environmental laws and regulations) except where such
noncompliance would not materially and adversely affect the Company, any of its
Subsidiaries or the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company and any of its
Subsidiaries, singly or taken as a whole.
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<PAGE> 11
(xxii) The Company and each of its Subsidiaries maintains
insurance of the types and in the amounts generally deemed adequate for its
business, including, but not limited to, insurance covering real and personal
property owned or leased by the Company and its Subsidiaries against theft,
damage, destruction, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect.
(xxiii) Neither the Company nor any of its Subsidiaries nor, to
the best of the Company's knowledge, any of its or their respective employees or
agents at any time during the last five years have (A) made any unlawful
contribution to any candidate for foreign office, or failed to disclose fully
any contribution in violation of law, or (B) made any payment to any federal or
state governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by the
laws of the United States or any jurisdiction thereof.
(xxiv) The Company and each of its Subsidiaries is in compliance
in all respects with all applicable Environmental Laws except to the extent that
any noncompliance would not materially and adversely affect the Company, any of
its Subsidiaries or the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company and any of its
Subsidiaries, singly or taken as a whole. Except as set forth in the
Registration Statement and Prospectus, neither the Company nor any of its
Subsidiaries have received any notice or other communication (in writing or
otherwise) that alleges that the Company or any of its Subsidiaries is not in
compliance with any Environmental Law where such noncompliance is required to be
disclosed in the Registration Statement and the Prospectus, and there are no
circumstances that may prevent or interfere with the Company's or any of its
Subsidiaries' compliance with any Environmental Law in the future. For purposes
of this Section 3(a)(xxiv), "Environmental Law" means any federal, state, local
or foreign legal requirement relating to pollution or protection of human health
or the environment.
(b) The Selling Stockholder represents, warrants and covenants to
each Underwriter that:
(i) All consents, approvals, authorizations and orders necessary
for the execution and delivery by the Selling Stockholder of this Agreement and
the Power-of-Attorney and Custody Agreement (hereinafter referred to as a
"Custody Agreement") hereinafter referred to, and for the sale and delivery of
the Selling Stockholder Shares to be sold by the Selling Stockholder hereunder,
have been obtained; and the Selling Stockholder has full right, power and
authority to enter into this Agreement and the Custody Agreement, to make the
representations, warranties and agreements hereunder and thereunder, and to
sell, assign, transfer and deliver the Shares to be sold by the Selling
Stockholder hereunder.
(ii) Certificates in negotiable form representing all of the
Selling Stockholder Shares to be sold by the Selling Stockholder have been
placed in custody under the Custody Agreement, in the form heretofore furnished
to you, duly executed and delivered by the Selling Stockholder to the Custodian,
and the Selling Stockholder has duly executed and delivered a power-of-attorney,
in the form heretofore furnished to you and included in the Custody Agreement
(the "Power-of-Attorney"), appointing Jack L. Saltich and Jeffrey D.
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<PAGE> 12
Buchanan, and each of them, as the Selling Stockholder's attorney-in-fact (the
"Attorneys-in-Fact") with authority to execute and deliver this Agreement on
behalf of the Selling Stockholder, to determine (subject to the provisions of
the Custody Agreement) the purchase price to be paid by the Underwriters to the
Selling Stockholder as provided in Section 2 hereof, to authorize the delivery
of the Selling Stockholder Shares to be sold by the Selling Stockholder
hereunder and otherwise to act on behalf of the Selling Stockholder in
connection with the transactions contemplated by this Agreement and the Custody
Agreement.
(iii) The Selling Stockholder specifically agrees that the
Selling Stockholder Shares represented by the certificates held in custody for
the Selling Stockholder under the Custody Agreement are for the benefit of and
coupled with and subject to the interests of the Underwriters, the Custodian,
the Attorneys-in-Fact and the Company, that the arrangements made by the Selling
Stockholder for such custody, and the appointment by the Selling Stockholder of
the Attorneys-in-Fact by the Power-of-Attorney, are to that extent irrevocable,
and that the obligations of the Selling Stockholder hereunder shall not be
terminated by operation of law, whether by the death, disability, incapacity,
liquidation or dissolution of any Selling Stockholder or by the occurrence of
any other event. If the Selling Stockholder or any executor or trustee for the
Selling Stockholder should die or become incapacitated (or if any Selling
Stockholder that is an estate or trust should be terminated, or if a Selling
Stockholder that is a partnership or corporation should be dissolved or if any
other such event should occur) before the delivery of the Selling Stockholder
Shares hereunder, certificates representing the Selling Stockholder Shares shall
be delivered by or on behalf of the Selling Stockholder in accordance with the
terms and conditions of this Agreement and of the Custody Agreement, and actions
taken by the Attorneys-in-Fact pursuant to the Powers-of-Attorney shall be as
valid as if such death or incapacity (or termination, dissolution or other
event) had not occurred, regardless of whether or not the Custodian, the
Attorneys-in-Fact, or any of them, shall have received notice of such death,
incapacity, termination, dissolution or other event.
(iv) This Agreement and the Custody Agreement have each been
duly authorized, executed and delivered by the Selling Stockholder and each such
document constitutes a valid and binding obligation of the Selling Stockholder,
enforceable in accordance with its terms (except as such enforceability may be
limited by applicable bankruptcy, insolvency, or other laws affecting creditors'
rights generally or by general principles of equity and except as rights to
indemnity or contribution may be limited by federal or state securities laws and
the public policy underlying such laws).
(v) No consent, approval, authorization or order of, or any
filing or declaration with, any court or governmental agency or body is required
in connection with the sale of the Selling Stockholder Shares by the Selling
Stockholder or the consummation by the Selling Stockholder of the transactions
on his part contemplated by this Agreement and the Custody Agreement, except
such as have been obtained under the Act or the Rules and Regulations and such
as may be required under state securities or Blue Sky laws or the by-laws and
rules of the NASD in connection with the purchase and distribution by the
Underwriters of the Selling Stockholder Shares.
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<PAGE> 13
(vi) The sale of the Selling Stockholder Shares and the
performance by the Selling Stockholder of this Agreement and the Custody
Agreement and the consummation of the transactions contemplated hereby and
thereby will not result in the creation or imposition of any lien, charge or
encumbrance upon any of the Shares pursuant to the terms or provisions of, or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any voting trust agreement, contract or other
agreement or instrument, relating directly or indirectly to any of the Shares,
to which the Selling Stockholder is a party, or violate or conflict with any
judgment , ruling, decree, order, statute, rule or regulation of any court or
other governmental agency or body applicable to the Selling Stockholder (or, if
the Selling Stockholder is a corporation, partnership or other entity, the
organizational documents of the Selling Stockholder).
(vii) The Selling Stockholder has, and at the Closing Date will
have, good and marketable title to the Selling Stockholder Shares to be sold by
the Selling Stockholder hereunder, free and clear of all liens, encumbrances,
equities or claims whatsoever; and, upon delivery of the Selling Stockholder
Shares and payment therefor pursuant hereto, good and valid title to the Selling
Stockholder Shares, free and clear of all liens, encumbrances, equities or
claims whatsoever, will be delivered to the Underwriters.
(viii) On the Closing Date all stock transfer or other taxes
(other than income taxes) that are required to be paid in connection with the
sale and transfer of the Selling Stockholder Shares to the several Underwriters
hereunder will have been fully paid or provided for by the Selling Stockholder
and all laws imposing such taxes will have been fully complied with.
(ix) Other than as permitted by the Act and the Rules and
Regulations, the Selling Stockholder has not distributed and will not distribute
any preliminary prospectus, the Prospectus or any other offering material in
connection with the offering and sale of the Shares. The Selling Stockholder has
not taken and will not at any time take, directly or indirectly, any action
designed, or which might reasonably be expected, to cause or result in, or which
will constitute, stabilization of the price of shares of Common Stock to
facilitate the sale or resale of any of the Shares.
(x) All information with respect to the Selling Stockholder
contained in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendment or supplement thereto complied or will comply in all
material respects with all applicable requirements of the Act and the Rules and
Regulations and does not and will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(xi) The Selling Stockholder has no knowledge of any material
fact or condition not set forth in the Registration Statement or the Prospectus
that has adversely affected, or may adversely affect, the business, properties,
business prospects, condition (financial or otherwise) or results of operations
of the Company or any of its Subsidiaries, and the sale of the Selling
Stockholder Shares is not prompted by any such knowledge.
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(xii) The Selling Stockholder has no reason to believe that the
representations and warranties of the Company contained in Section 3(a) hereof
are not true and correct.
(xiii) In order to document the Underwriters' compliance with
the reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein contemplated,
the Selling Stockholder agrees to deliver to you prior to or at the Closing Date
a properly completed and executed United States Treasury Department Form W 9 (or
other applicable form or statement specified by Treasury Department regulations
in lieu thereof).
4. Agreements of the Company and the Selling Stockholder.
Each of the Company and the Selling Stockholder respectively covenants
and agrees with the several Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or
thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a reasonable period of time prior to the filing thereof
and the Representatives shall not have objected thereto in good faith.
(b) The Company will use its best efforts to cause the Registration
Statement to become effective, and will notify the Representatives promptly, and
will confirm such advice in writing, (i) when the Registration Statement has
become effective and when any post-effective amendment thereto becomes
effective, (ii) of any request by the Commission for amendments or supplements
to the Registration Statement or the Prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose or the threat thereof, (iv) of the happening of any event
during the period mentioned in the second sentence of Section 4(e) that in the
judgment of the Company makes any statement made in the Registration Statement
or the Prospectus untrue or that requires the making of any changes in the
Registration Statement or the Prospectus in order to make the statements
therein, in the light of the circumstances in which they are made, not
misleading and (v) of receipt by the Company or any representative or attorney
of the Company of any other communication from the Commission relating to the
Company, the Registration Statement, any preliminary prospectus or the
Prospectus. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible moment. If the Company has omitted any information from the
Registration Statement pursuant to Rule 430A of the Rules and Regulations, the
Company will comply with the provisions of and make all requisite filings with
the Commission pursuant to said Rule 430A and notify the Representatives
promptly of all such filings.
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(c) The Company will furnish to each Representative, without charge,
one signed copy of each of the Registration Statement and of any post-effective
amendment thereto, including financial statements and schedules, and all
exhibits thereto and will furnish to the Representatives, without charge, for
transmittal to each of the other Underwriters, a copy of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules but without exhibits.
(d) The Company will comply with all the provisions of any
undertakings contained in the Registration Statement.
(e) On the Effective Date, and thereafter from time to time, the
Company will deliver to each of the Underwriters, without charge, as many copies
of the Prospectus or any amendment or supplement thereto as the Representatives
may reasonably request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by the several Underwriters and by all dealers
to whom the Shares may be sold, both in connection with the offering or sale of
the Shares and for any period of time thereafter during which the Prospectus is
required by law to be delivered in connection therewith. If during such period
of time any event shall occur which in the judgment of the Company or counsel to
the Underwriters should be set forth in the Prospectus in order to make any
statement therein, in the light of the circumstances under which it was made,
not misleading, or if it is necessary to supplement or amend the Prospectus to
comply with law, the Company will forthwith prepare and duly file with the
Commission an appropriate supplement or amendment thereto, and will deliver to
each of the Underwriters, without charge, such number of copies of such
supplement or amendment to the Prospectus as the Representatives may reasonably
request. The Company will not file any document under the Exchange Act or the
Exchange Act Rules and Regulations before the termination of the offering of the
Shares by the Underwriters, if such document would be deemed to be incorporated
by reference into the Prospectus, that is not approved by the Representatives
after reasonable notice thereof.
(f) Prior to any public offering of the Shares, the Company will
cooperate with the Representatives and counsel to the Underwriters in connection
with the registration or qualification of the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as the Representatives may
request; provided, that in no event shall the Company be obligated to qualify to
do business in any jurisdiction where it is not now so qualified or to take any
action which would subject it to general service of process in any jurisdiction
where it is not now so subject.
(g) The Company will, so long as required under the Rules and
Regulations, furnish to its stockholders as soon as practicable after the end of
each fiscal year an annual report (including a balance sheet and statements of
income, stockholders' equity and cash flow of the Company and its consolidated
Subsidiaries, if any, certified by independent public accountants) and, as soon
as practicable after the end of each of the first three quarters of each fiscal
year (beginning with the fiscal quarter ending after the effective date of the
Registration Statement), consolidated summary financial information of the
Company and its Subsidiaries, if any, for such quarter in reasonable detail.
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<PAGE> 16
(h) During the period of five years commencing on the Effective
Date, the Company will furnish to the Representatives and each other Underwriter
who may so request copies of such financial statements and other periodic and
special reports as the Company may from time to time distribute generally to the
holders of any class of its capital stock, and will furnish to the
Representatives and each other Underwriter who may so request a copy of each
annual or other report it shall be required to file with the Commission.
(i) The Company will make generally available to holders of its
securities as soon as may be practicable but in no event later than the last day
of the fifteenth full calendar month following the calendar quarter in which the
Effective Date falls, an earnings statement (which need not be audited but shall
be in reasonable detail) for a period of 12 months ended commencing after the
Effective Date, and satisfying the provisions of Section 11(a) of the Act
(including Rule 158 of the Rules and Regulations).
(j) Whether or not the transactions contemplated by this Agreement
are consummated or this Agreement is terminated, the Company will pay or
reimburse (if paid by the Representatives) all costs and expenses incident to
the performance of the obligations of the Company under this Agreement and in
connection with the transactions contemplated hereby, including but not limited
to costs and expenses of or relating to (i) the preparation, printing and filing
of the Registration Statement and exhibits to it, each preliminary prospectus,
Prospectus and any amendment or supplement to the Registration Statement or
Prospectus, (ii) the preparation and delivery of certificates representing the
Shares, (iii) the printing of this Agreement, the Agreement Among Underwriters,
any Selected Dealer Agreements, any Underwriters' Questionnaires, any
Underwriters' Powers of Attorney, and any invitation letters to prospective
Underwriters, (iv) furnishing (including costs of shipping and mailing) such
copies of the Registration Statement, the Prospectus and any preliminary
prospectus, and all amendments and supplements thereto, as may be requested for
use in connection with the offering and sale of the Shares by the Underwriters
or by dealers to whom Shares may be sold, (v) the listing of the Shares on the
NYSE, (vi) any filings required to be made by the Underwriters with the NASD,
and the fees, disbursements and other charges of counsel for the Underwriters in
connection therewith, (vii) the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of such jurisdictions
designated pursuant to Section 4(f), including the fees, disbursements and other
charges of counsel to the Underwriters in connection therewith, and the
preparation and printing of preliminary, supplemental and final Blue Sky
memoranda, (viii) fees, disbursements and other charges of counsel to the
Company (but not those of counsel for the Underwriters, except as otherwise
provided herein) and (ix) the transfer agent for the Shares. The Underwriters
may deem the Company to be the primary obligor with respect to all costs, fees
and expenses to be paid by the Company and by the Selling Stockholder. The
Selling Stockholder will pay (directly or by reimbursement) all fees and
expenses incident to the performance of such Selling Stockholder's obligations
under this Agreement that are not otherwise specifically provided for herein,
including but not limited to any fees and expenses of counsel for such Selling
Stockholder, any fees and expenses of the Attorneys-in-Fact and the Custodian,
and all expenses and taxes incident to the sale and delivery of the Shares to be
sold by such Selling Stockholder to the Underwriters hereunder.
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<PAGE> 17
(k) The Company will not at any time, directly or indirectly, take
any action designed or which might reasonably be expected to cause or result in,
or which will constitute, stabilization of the price of the shares of Common
Stock to facilitate the sale or resale of any of the Shares.
(l) The Company will apply the net proceeds from the offering and
sale of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds."
(m) During the period beginning from the date hereof and continuing
to and including the date 90 days after the date of the Prospectus, without the
prior written consent of Needham & Company, Inc., the Company will not offer,
sell, contract to sell, grant options to purchase or otherwise dispose of any
Common Stock or other equity securities of the Company or any other securities
convertible into or exchangeable with its Common Stock or other equity
securities (other than pursuant to employee stock option plans or the conversion
of convertible securities or the exercise of warrants outstanding on the date of
this Agreement).
(n) During the period of 90 days after the date of the Prospectus,
the Company will not file with the Commission or cause to become effective any
registration statement relating to any securities of the Company without the
prior written consent of Needham & Company, Inc.
(o) The Selling Stockholder will, and the Company will cause each of
its executive officers and directors to, enter into lock-up agreements with the
Representatives to the effect that they will not, without the prior written
consent of Needham & Company, Inc., sell, contract to sell or otherwise dispose
of any shares of Common Stock or rights to acquire such shares, according to the
form of Lock-up Agreement set forth in Schedule II hereto.
5. Conditions of the Obligations of the Underwriters. The obligations
of each Underwriter hereunder are subject to the following conditions:
(a) Notification that the Registration Statement has become
effective shall be received by the Representatives not later than 5:00 p.m., New
York City time, on the date of this Agreement or at such later date and time as
shall be consented to in writing by the Representatives and all filings required
by Rule 424 and Rule 430A of the Rules and Regulations shall have been made.
(b) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall be pending or threatened by the Commission, (ii) no order
suspending the effectiveness of the Registration Statement or the qualification
or registration of the Shares under the securities or Blue Sky laws of any
jurisdiction shall be in effect and no proceeding for such purpose shall be
pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such authorities
shall have been complied with to the satisfaction of the staff of the Commission
or such authorities and (iv) after the date hereof no amendment or supplement to
the Registration
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<PAGE> 18
Statement or the Prospectus shall have been filed unless a copy thereof was
first submitted to the Representatives and the Representatives do not object
thereto in good faith, and the Representatives shall have received certificates,
dated the Closing Date and, if later, the Option Closing Date and signed by the
Chief Executive Officer and the Chief Financial Officer of the Company (who may,
as to proceedings threatened, rely upon the best of their information and
belief), to the effect of clauses (i), (ii) and (iii) of this paragraph.
(c) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, business prospects,
properties, management, condition (financial or otherwise) or results of
operations of the Company and any of its Subsidiaries, singly or taken as a
whole, whether or not arising from transactions in the ordinary course of
business, in each case other than as described in or contemplated by the
Registration Statement and the Prospectus, and (ii) the Company shall not have
sustained any material loss or interference with its business or properties from
fire, explosion, flood or other casualty, whether or not covered by insurance,
or from any labor dispute or any court or legislative or other governmental
action, order or decree, which is not described in the Registration Statement
and the Prospectus, if in the judgment of the Representatives any such
development makes it impracticable or inadvisable to consummate the sale and
delivery of the Shares by the Underwriters at the initial public offering price.
(d) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there shall have been no
litigation or other proceeding instituted against the Company, any of its
Subsidiaries, or any of their officers or directors in their capacities as such,
before or by any Federal, state or local court, commission, regulatory body,
administrative agency or other governmental body, domestic or foreign, in which
litigation or proceeding an unfavorable ruling, decision or finding would, in
the judgment of the Representatives, materially and adversely affect the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company and its Subsidiaries, singly or taken as a
whole.
(e) Each of the representations and warranties of the Company
contained herein shall be true and correct in all material respects at the
Closing Date and, with respect to the Option Shares, at the Option Closing Date,
and all covenants and agreements contained herein to be performed on the part of
the Company and all conditions contained herein to be fulfilled or complied with
by the Company at or prior to the Closing Date and, with respect to the Option
Shares, at or prior to the Option Closing Date, shall have been duly performed,
fulfilled or complied with.
(f) The Representatives shall have received an opinion, dated the
Closing Date and, with respect to the Option Shares, the Option Closing Date,
satisfactory in form and substance to the Representatives and to counsel for the
Underwriters from Greenberg Traurig, P.A., counsel to the Company, with respect
to the following matters:
(i) The Company is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of incorporation; has
full corporate power and
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authority to conduct all the activities conducted by it, to own or lease all the
assets owned or leased by it and to conduct its business as described in the
Registration Statement and Prospectus; and is duly licensed or qualified to do
business and is in good standing as a foreign corporation in all jurisdictions
in which the nature of the activities conducted by it or the character of the
assets owned or leased by it makes such license or qualification necessary and
where the failure to be licensed or qualified would have a material and adverse
effect on the business or financial condition of the Company or such Subsidiary.
(ii) All of the outstanding shares of capital stock of the
Company (including the Selling Stockholder Shares) have been duly authorized,
validly issued and are fully paid and nonassessable, to such counsel's
knowledge, were issued pursuant to the registration and qualification
requirements of federal and applicable state securities laws or exemptions
therefrom, and were not issued in violation of or subject to any preemptive or,
to such counsel's knowledge, similar rights;
(iii) The specimen certificate evidencing the Common Stock filed
as an exhibit to the Registration Statement is in due and proper form under
Delaware law, the Shares have been duly authorized and, when issued and paid for
as contemplated by this Agreement, will be validly issued, fully paid and
nonassessable; and no preemptive or similar rights exist with respect to any of
the Shares or the issue and sale thereof.
(iv) To such counsel's knowledge, all of the outstanding shares
of capital stock of each Subsidiary are owned by the Company free and clear of
all claims, liens, charges and encumbrances and there are no securities
outstanding that are convertible into or exercisable or exchangeable for capital
stock of any Subsidiary.
(v) The authorized and outstanding capital stock of the Company
is as set forth in the Registration Statement and the Prospectus in the column
entitled "Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to this Agreement or pursuant to reservations,
agreements, employee benefit plans or the exercise of convertible securities,
options or warrants referred to in the Prospectus). To such counsel's knowledge,
except as disclosed in or specifically contemplated by the Prospectus, there are
no outstanding options, warrants of other rights calling for the issuance of,
and no commitments, plans or arrangements to issue, any shares of capital stock
of the Company or any security convertible into or exchangeable or exercisable
for capital stock of the Company. The description of the capital stock of the
Company in the Registration Statement and the Prospectus conforms in all
material respects to the terms thereof.
(vi) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened to which the Company or any of
its Subsidiaries is a party or to which any of their respective properties is
subject that are required to be described in the Registration Statement or the
Prospectus but are not so described.
(vii) No consent, approval, authorization or order of, or any
filing or declaration with, any court or governmental agency or body is required
for the consummation by
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the Company of the transactions on its part contemplated under this Agreement,
except such as have been obtained or made under the Act or the Rules and
Regulations and such as may be required under state securities or Blue Sky laws
or the by-laws and rules of the NASD in connection with the purchase and
distribution by the Underwriters of the Shares.
(viii) The Company has the corporate power and authority to enter
into this Agreement. This Agreement has been duly authorized, executed and
delivered by the Company.
(ix) The execution and delivery of this Agreement, the compliance
by the Company with all of the terms hereof and the consummation of the
transactions contemplated hereby does not contravene any provision of applicable
law or the Certificate of Incorporation or By-Laws of the Company or the charter
documents of any of its Subsidiaries, and to the best of such counsel's
knowledge will not result in the creation or imposition of any lien, charge or
encumbrance upon any of the assets of the Company or any of its Subsidiaries
pursuant to the terms and provisions of, result in a breach or violation of any
of the terms or provisions of, or constitute a default under, or give any party
a right to terminate any of its obligations under, or result in the acceleration
of any obligation under, any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument known to such
counsel to which the Company or any of its Subsidiaries is a party or by which
the Company, any of its Subsidiaries, or any of their respective properties is
bound or affected, or violate or conflict with (A) any judgment, ruling, decree
or order known to such counsel or (B) any statute, rule or regulation of any
court or other governmental agency or body, applicable to the business or
properties of the Company or any of its Subsidiaries.
(x) To such counsel's knowledge, there is no document or contract
of a character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement which is
not described or filed or incorporated by reference as required, and each
description of such contracts and documents that is contained in the
Registration Statement and Prospectus fairly presents in all material respects
the information required under the Act and the Rules and Regulations.
(xi) The statements (A) in the Prospectus under the captions
"Risk Factors -- Sales of large numbers of shares could adversely affect the
price of our common stock", "Risk Factors -- Change in control provisions may
adversely affect existing stockholders" and "Business -- Intellectual Property";
(B) in the Company's annual report on Form 10-K for the fiscal year ended
December 31, 1998 under the captions "Special Considerations -- Rights to
Acquire Shares", "Special Considerations -- Change in Control Provisions",
"Special Considerations -- Repurchases of Common Stock" and "Special
Considerations -- Shares Eligible for Future Sale; Potential Depressive Effect
on Stock Price"; (C) in the definitive proxy statement on Schedule 14A filed
March 19, 1999 under the captions "Executive Compensation -- Employment
Agreements" and "Executive Compensation -- Stock Option Plans and Directors'
Stock Plan"; and (D) in the Form 8-A (Registration No. 1-4373) declared
effective by the SEC on December 28, 1994 under the caption "Description of
Registrant's Securities to be Registered", insofar as the statements constitute
a summary of documents referred to therein or
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matters of law, are accurate summaries and fairly and correctly present, in all
material respects, the information called for with respect to such documents and
matters (provided, however, that such counsel may rely on representations of the
Company with respect to the factual matters contained in such statements, and
provided further that such counsel shall state that nothing has come to the
attention of such counsel which leads them to believe that such representations
are not true and correct in all material respects).
(xii) The Company is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act of
1940, as amended.
(xiii) The Shares have been duly authorized for listing on the
NYSE subject to notice of issuance.
(xiv) To such counsel's knowledge, no holder of securities of the
Company has rights, which have not been waived or satisfied, to require the
Company to register with the Commission shares of Common Stock or other
securities, as part of the offering contemplated hereby.
(xv) The Registration Statement has become effective under the
Act, and to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending, threatened or contemplated.
(xvi) The Registration Statement and the Prospectus comply as to
form in all material respects with the requirement of the Act and the Rules and
Regulations (other than the financial statements, schedules and other financial
data contained or incorporated by reference in the Registration Statement or the
Prospectus, as to which such counsel need express no opinion).
(xvii) The documents incorporated by reference in the Prospectus
(other than the financial statements, schedules and other financial data
contained therein, as to which such counsel need express no opinion), when they
were filed with the Commission, complied as to form in all material respects
with the requirements of the Exchange Act and the Exchange Act Rules and
Regulations.
(xviii) This Agreement and the Custody Agreement have each been
duly executed and delivered by or on behalf of the Selling Stockholder; the
Custody Agreement constitutes a valid and binding agreement of the Selling
Stockholder enforceable in accordance with its terms, except as enforceability
may be limited by the application of bankruptcy, insolvency or other laws
affecting creditors' rights generally or by general principles of equity; the
Attorneys-in-Fact and the Custodian have been duly authorized by the Selling
Stockholder to deliver the Selling Stockholder Shares on behalf of the Selling
Stockholder in accordance with the terms of this Agreement; and the sale of the
Selling Stockholder Shares, the performance by the Selling Stockholder of this
Agreement and the Custody Agreement and the consummation of the transactions
contemplated hereby and thereby will not result in a breach or violation of any
of
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the terms or provisions of, or constitute a default under, or give any party a
right to terminate any of its obligations under, or result in the acceleration
of any obligation under any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument known to such
counsel to which the Selling Stockholder is a party or by which the Selling
Stockholder or any of his properties is bound or affected, or violate or
conflict with any judgment, ruling, decree, order, statute, rule or regulation
of any court or other governmental agency or body applicable to the Selling
Stockholder.
(xix) No consent, approval, authorization or order of, or any
filing or declaration with, any court or governmental agency or body is required
for the consummation by the Selling Stockholder of the transactions on his part
contemplated by this Agreement, except such as have been obtained or made under
the Act or the Rules and Regulations and such as may be required under state
securities or Blue Sky laws or the by-laws and rules of the NASD in connection
with the purchase and distribution by the Underwriters of the Shares.
(xx) The Selling Stockholder has full legal right, power and
authority to enter into this Agreement and the Custody Agreement and to sell,
assign, transfer and deliver the Selling Stockholder Shares hereunder and, upon
payment for the Selling Stockholder Shares and assuming that the Underwriters
are purchasing such Shares in good faith and without notice of any other adverse
claim within the meaning of the Uniform Commercial Code, the Underwriters will
have acquired all rights of the Selling Stockholder in the Selling Stockholder
Shares free of any adverse claim, any lien in favor of the Company and any
restrictions on transfer imposed by the Company.
In rendering such opinion, such counsel may rely as to matters of local
law on opinions of counsel satisfactory in form and substance to the
Representatives and to counsel for the Underwriters, provided that the opinion
of counsel to the Company shall state that such counsel are doing so, that they
have no reason to believe that they and the Underwriters are not entitled to
rely on such opinions and that copies of such opinions are to be attached to the
opinion.
In rendering the opinions in subparagraphs (xvii) through (xix) above,
such counsel may rely upon opinions of other counsel retained by the Selling
Stockholder reasonably acceptable to the Representatives and as to matters of
fact on certificates of the Selling Stockholder, officers of the Company and
governmental officials and the representations and warranties of the Company and
the Selling Stockholder contained in this Agreement and the Custody Agreement,
provided that the opinion of counsel to the Company and Selling Stockholder
shall state that such counsel are doing so, that they have no reason to believe
that they and the Underwriters are not entitled to rely on such opinions or
certificates and that copies of such opinions or certificates are to be attached
to the opinion.
Such counsel shall also state that such counsel has participated in the
preparation of the Registration Statement and Prospectus and, without
independent check or verification, such counsel has no knowledge of any facts
that would cause them to believe that, as of the Effective Date the Registration
Statement, or any amendment or supplement thereto, (other than the financial
statements, schedules and other financial data contained or incorporated by
reference
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therein, as to which such counsel need express no opinion) contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
that the Prospectus, or any amendment or supplement thereto, as of its date and
the Closing Date and, if later, the Option Closing Date, contained or contains
any untrue statement of a material fact or omitted or omits to state a material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (other than the financial statements,
schedules and other financial data contained or incorporated by reference
therein, as to which such counsel need express no opinion).
(g) The Representatives shall have received an opinion, dated the
Closing Date and, with respect to the Option Shares, the Option Closing Date,
satisfactory in form and substance to the Representatives and to counsel for the
Underwriters from Wragge & Co, counsel to Three-Five Systems Limited, that
Three-Five Systems Limited is a private company limited by shares duly
organized, validly existing and in good standing under the laws of its
jurisdiction of formation; has full corporate power and authority to conduct all
the activities conducted by it, to own or lease all the assets owned or leased
by it and to conduct its business as described in the Registration Statement and
Prospectus; and is duly licensed or qualified to do business and is in good
standing as a foreign company in all jurisdictions in which the nature of the
activities conducted by it or the character of the assets owned or leased by it
makes such license or qualification necessary and where the failure to be
licensed or qualified would have a material and adverse effect on the business
or financial condition of the Company and its Subsidiaries, taken as a whole;
and that all of the outstanding shares of capital stock of Three-Five Systems
Limited have been duly authorized and validly issued and are fully paid and
nonassessable.
(h) The Representatives shall have received an opinion, dated the
Closing Date and, with respect to the Option Shares, the Option Closing Date,
satisfactory in form and substance to the Representatives and to counsel for the
Underwriters from SyCip Salazar Hernandez & Gatmaitan, counsel to Three-Five
Systems Pacific, Inc., that Three-Five Systems Pacific, Inc. is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of formation; has full corporate power and authority to conduct all
the activities conducted by it, to own or lease all the assets owned or leased
by it and to conduct its business as described in the Registration Statement and
Prospectus; and is duly licensed or qualified to do business and is in good
standing as a foreign corporation in all jurisdictions in which the nature of
the activities conducted by it or the character of the assets owned or leased by
it makes such license or qualification necessary and where the failure to be
licensed or qualified would have a material and adverse effect on the business
or financial condition of the Company and its Subsidiaries, taken as a whole;
and that all of the outstanding shares of capital stock of Three-Five Systems
Pacific, Inc. have been duly authorized and validly issued and are fully paid
and nonassessable.
(i) The Representatives shall have received an opinion, dated the
Closing Date and, with respect to the Option Shares, the Option Closing Date,
satisfactory in form and substance to the Representatives and to counsel for the
Underwriters from Davis Wright Tremaine LLP, counsel to Three-Five Systems
(Beijing), Ltd., that Three-Five Systems (Beijing), Ltd. is a limited liability
company duly organized, validly existing and in good standing under the laws of
its jurisdiction of formation; has full corporate power and authority to conduct
all the activities conducted by it, to own or lease all the assets owned or
leased by it and to conduct its business as described in the Registration
Statement and Prospectus; and is duly licensed or qualified to do business and
is in good standing as a foreign company in all jurisdictions in which the
nature of the activities conducted by it or the character of the assets owned or
leased by it makes such license or qualification necessary and where the failure
to be licensed or qualified would have a material and adverse effect on the
business or financial condition of the Company and its Subsidiaries, taken as a
whole; and that all of the outstanding shares of capital stock of Three-Five
Systems (Beijing), Ltd. have been duly authorized and validly issued and are
fully paid and nonassessable.
(j) The Representatives shall have received an opinion, dated the
Closing Date and the Option Closing Date, from Gray Cary Ware & Freidenrich LLP,
counsel to the Underwriters, with respect to the Registration Statement, the
Prospectus and this Agreement, which opinion shall be satisfactory in all
respects to the Representatives.
(k) Concurrently with the execution and delivery of this Agreement, the
Accountants shall have furnished to the Representatives a letter, dated the date
of its delivery, addressed to the Representatives and in form and substance
satisfactory to the Representatives, confirming that they are independent
accountants with respect to the Company and its Subsidiaries as required by the
Act, the Exchange Act and the Rules and Regulations and with respect to certain
financial and other statistical and numerical information contained or
incorporated by reference in the Registration Statement. At the Closing Date
and, as to the Option Shares, the Option Closing Date, the Accountants shall
have furnished to the Representatives a letter, dated the date of its delivery,
which shall confirm, on the basis of a review in accordance with the procedures
set forth in the letter from the Accountants, that nothing has come to their
attention during the period from the date of the letter referred to in the prior
sentence to a date (specified in the letter) not more than five days prior to
the Closing Date and the Option Closing Date, as the case may be, which would
require any change in their letter dated the date hereof if it were required to
be dated and delivered at the Closing Date and the Option Closing Date.
(l) Concurrently with the execution and delivery of this Agreement and
at the Closing Date and, as to the Option Shares, the Option Closing Date, there
shall be furnished to the Representatives a certificate, dated the date of its
delivery, signed by each of the Chief Executive Officer and the Chief Financial
Officer of the Company, in form and substance satisfactory to the
Representatives, to the effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus (including any documents filed under
the Exchange Act and deemed to be incorporated by reference into the Prospectus)
and (A) as of the date of such certificate, such documents are true and correct
in all material respects and do not omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not untrue
or misleading and (B) in the case of the certificate delivered at the Closing
Date and the Option Closing Date, since the Effective Date no event has occurred
as a result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein not untrue or misleading.
23
<PAGE> 24
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the time
such certificate is delivered, true and correct.
(iii) Each of the covenants required to be performed by the Company
herein on or prior to the date of such certificate has been duly, timely and
fully performed and each condition herein required to be satisfied or fulfilled
on or prior to the date of such certificate has been duly, timely and fully
satisfied or fulfilled.
(m) Concurrently with the execution and delivery of this Agreement and
at the Closing Date and, as to the Option Shares, the Option Closing Date, there
shall be furnished to the Representatives a certificate, dated the date of its
delivery, signed by the Selling Stockholder (or the Attorneys-in-Fact on his
behalf), in form and substance satisfactory to the Representatives, to the
effect that the representations and warranties of the Selling Stockholder
contained herein are true and correct in all material respects on and as of the
date of such certificate as if made on and as of the date of such certificate,
and each of the covenants and conditions required herein to be performed or
complied with by the Selling Stockholder on or prior to the date of such
certificate has been duly, timely and fully performed or complied with.
(n) On or prior to the Closing Date, the Representatives shall have
received the executed agreements referred to in Section 4(o).
(o) The Shares shall be qualified for sale in such jurisdictions as the
Representatives may reasonably request and each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing Date
or the Option Closing Date.
(p) Prior to the Closing Date, the Shares shall have been duly
authorized for listing on the NYSE upon official notice of issuance.
(q) The Company and the Selling Stockholder shall have furnished to the
Representatives such certificates, in addition to those specifically mentioned
herein, as the Representatives may have reasonably requested as to the accuracy
and completeness at the Closing Date and the Option Closing Date of any
statement in the Registration Statement or the Prospectus, as to the accuracy at
the Closing Date and the Option Closing Date of the representations and
warranties of the Company herein, as to the performance by the Company of its
obligations hereunder, or as to the fulfillment of the conditions concurrent and
precedent to the obligations hereunder of the Representatives.
6. Indemnification.
(a) The Company will indemnify and hold harmless each Underwriter, the
directors, officers, employees and agents of each Underwriter and each person,
if any, who controls each Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, from and against any and all losses,
claims, liabilities, expenses and damages (including any and all investigative,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim asserted), to
which they, or any of them, may become subject under the Act, the Exchange Act
or other
24
<PAGE> 25
Federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, liabilities, expenses or damages arise out of or
are based in whole or in part on (i) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus, the
Registration Statement or the Prospectus or any amendment or supplement to the
Registration Statement or the Prospectus, (ii) the omission or alleged omission
to state in such document a material fact required to be stated in it or
necessary to make the statements in it not misleading in the light of the
circumstances in which they were made, or (iii) any inaccuracy in the
representations and warranties of the Company contained herein or any failure of
the Company to perform its obligations hereunder or under law in connection with
the transactions contemplated hereby; provided, however, that (x) the Company
will not be liable to the extent that such loss, claim, liability, expense or
damage arises from the sale of the Shares in the public offering to any person
by an Underwriter and is based on an untrue statement or omission or alleged
untrue statement or omission made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives, on behalf of any Underwriter, expressly for inclusion in
the Registration Statement, the preliminary prospectus or the Prospectus and (y)
the Company will not be liable to any Underwriter, the directors, officers,
employees or agents of such Underwriter or any person controlling such
Underwriter with respect to any loss, claim, liability, expense, or damage
arising out of or based on any untrue statement or omission or alleged untrue
statement or omission or alleged omission to state a material fact in the
preliminary prospectus which is corrected in the Prospectus if the person
asserting any such loss, claim, liability, charge or damage purchased Shares
from such Underwriter but was not sent or given a copy of the Prospectus at or
prior to the written confirmation of the sale of such Shares to such person. The
Company acknowledges that the statements set forth under the heading
"Underwriting" in the preliminary prospectus and the Prospectus constitute the
only information relating to any Underwriter furnished in writing to the Company
by the Representatives on behalf of the Underwriters expressly for inclusion in
the Registration Statement, the preliminary prospectus or the Prospectus. This
indemnity agreement will be in addition to any liability that the Company might
otherwise have.
(b) The Selling Stockholder will indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each Underwriter
and each person, if any, who controls each Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, from and against any
and all losses, claims, liabilities, expenses and damages (including any and all
investigative, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted), to which they, or any of them, may become subject under the
Act, the Exchange Act or other Federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, liabilities, expenses
or damages arise out of or are based in whole or in part on (i) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus, (ii)
the omission or alleged omission to state in such document a material fact
required to be stated in it or necessary to make the statements in it not
misleading in the light of the circumstances in which they were made, or (iii)
any inaccuracy in the representations and warranties of the Selling Stockholder
contained herein or any failure of the Selling Stockholder to perform his
obligations hereunder or under law in connection with the transactions
contemplated hereby; provided, however, that (x) the Selling
25
<PAGE> 26
Stockholder will not be liable to the extent that such loss, claim, liability,
expense or damage arises from the sale of the Shares in the public offering to
any person by an Underwriter and is based on an untrue statement or omission or
alleged untrue statement or omission made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives, on behalf of any Underwriter, expressly for inclusion in
the Registration Statement, the preliminary prospectus or the Prospectus; (y)
the Selling Stockholder will not be liable to any Underwriter, the directors,
officers, employees or agents of such Underwriter or any person controlling such
Underwriter with respect to any loss, claim, liability, expense, or damage
arising out of or based on any untrue statement or omission or alleged untrue
statement or omission or alleged omission to state a material fact in the
preliminary prospectus which is corrected in the Prospectus if the person
asserting any such loss, claim, liability, charge or damage purchased Shares
from such Underwriter but was not sent or given a copy of the Prospectus at or
prior to the written confirmation of the sale of such Shares to such person; and
(z) the liability of the Selling Stockholder under this Section 6(b) shall not
exceed the product of the purchase price for each Share set forth in Section
1(a) hereof multiplied by the number of Selling Stockholder Shares sold
hereunder (less (1) the amount of the underwriting commissions paid thereon to
the Underwriters by the Selling Stockholder and (2) any costs or expenses paid
by the Selling Stockholder incident to the performance of the obligations of the
Company or the Selling Stockholder under this Agreement and in connection with
the transactions contemplated hereby including, but not limited to, those costs
and expenses of the type described in Section 4(j)). The Selling Stockholder
acknowledges that the statements set forth under the heading "Underwriting" in
the preliminary prospectus and the Prospectus constitute the only information
relating to any Underwriter furnished in writing to the Company by the
Representatives on behalf of the Underwriters expressly for inclusion in the
Registration Statement, the preliminary prospectus or the Prospectus. This
indemnity agreement will be in addition to any liability that the Selling
Stockholder might otherwise have.
(c) Each Underwriter will indemnify and hold harmless the Company, each
director of the Company, each officer of the Company who signs the Registration
Statement, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, and the Selling
Stockholder to the same extent as the foregoing indemnity from the Company to
each Underwriter, as set forth in Section 6(a), but only insofar as losses,
claims, liabilities, expenses or damages arise out of or are based on any untrue
statement or omission or alleged untrue statement or omission made in reliance
on and in conformity with information relating to any Underwriter furnished in
writing to the Company by the Representatives, on behalf of such Underwriter,
expressly for use in the Registration Statement, the preliminary prospectus or
the Prospectus. The Company and the Selling Stockholder acknowledge that the
statements set forth under the heading "Underwriting" in the preliminary
prospectus and the Prospectus constitute the only information relating to any
Underwriter furnished in writing to the Company by the Representatives on behalf
of the Underwriters expressly for inclusion in the Registration Statement, the
preliminary prospectus or the Prospectus. This indemnity will be in addition to
any liability that each Underwriter might otherwise have.
(d) Any party that proposes to assert the right to be indemnified under
this Section 6 shall, promptly after receipt of notice of commencement of any
action against such
26
<PAGE> 27
party in respect of which a claim is to be made against an indemnifying party or
parties under this Section 6, notify each such indemnifying party in writing of
the commencement of such action, enclosing with such notice a copy of all papers
served, but the omission so to notify such indemnifying party will not relieve
it from any liability that it may have to any indemnified party under the
foregoing provisions of this Section 6 unless, and only to the extent that, such
omission results in the loss of substantive rights or defenses by the
indemnifying party. If any such action is brought against any indemnified party
and it notifies the indemnifying party of its commencement, the indemnifying
party will be entitled to participate in and, to the extent that it elects by
delivering written notice to the indemnified party promptly after receiving
notice of the commencement of the action from the indemnified party, jointly
with any other indemnifying party similarly notified, to assume the defense of
the action, with counsel reasonably satisfactory to the indemnified party. After
notice from the indemnifying party to the indemnified party of its election to
assume the defense, the indemnifying party will not be liable to the indemnified
party for any legal or other expenses except as provided below and except for
the reasonable costs of investigation subsequently incurred by the indemnified
party in connection with the defense. The indemnified party will have the right
to employ its own counsel in any such action, but the fees, expenses and other
charges of such counsel will be at the expense of such indemnified party unless
(i) the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (ii) the indemnified party has reasonably
concluded (based on advice of counsel) that there may be legal defenses
available to it or other indemnified parties that are different from or in
addition to those available to the indemnifying party, (iii) a conflict or
potential conflict exists (based on advice of counsel to the indemnified party)
between the indemnified party and the indemnifying party (in which case the
indemnifying party will not have the right to direct the defense of such action
on behalf of the indemnified party) or (iv) the indemnifying party has not in
fact employed counsel to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel will be at
the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable fees,
disbursements and other charges of more than one separate firm admitted to
practice in such jurisdiction at any one time for all such indemnified party or
parties. All such fees, disbursements and other charges will be reimbursed by
the indemnifying party promptly as they are incurred. Any indemnifying party
will not be liable for any settlement of any action or claim effected without
its written consent (which consent will not be unreasonably withheld).
(e) If the indemnification provided for in this Section 6 is applicable
in accordance with its terms but for any reason is held to be unavailable to or
insufficient to hold harmless an indemnified party under paragraphs (a), (b) and
(c) of this Section 6 in respect of any losses, claims, liabilities, expenses
and damages referred to therein, then each applicable indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable (including any investigative, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claim asserted, but after deducting any contribution
received by the Company or the Selling Stockholder from persons other than the
Underwriters, such as persons who control the Company within the meaning of the
Act, officers of the Company who signed the Registration Statement and directors
of the Company, who also may be liable for contribution) by such
27
<PAGE> 28
indemnified party as a result of such losses, claims, liabilities, expenses and
damages in such proportion as shall be appropriate to reflect the relative
benefits received by the Company and the Selling Stockholder, on the one hand,
and the Underwriters, on the other hand. The relative benefits received by the
Company and the Selling Stockholder, on the one hand, and the Underwriters, on
the other hand, shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
and the Selling Stockholder bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. If, but only if, the allocation provided by
the foregoing sentence is not permitted by applicable law, the allocation of
contribution shall be made in such proportion as is appropriate to reflect not
only the relative benefits referred to in the foregoing sentence but also the
relative fault of the Company and the Selling Stockholder, on the one hand, and
the Underwriters, on the other hand, with respect to the statements or omissions
which resulted in such loss, claim, liability, expense or damage, or action in
respect thereof, as well as any other relevant equitable considerations with
respect to such offering. Such relative fault shall be determined by reference
to whether the untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact relates to information supplied by
the Company, the Selling Stockholder or the Representatives on behalf of the
Underwriters, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholder and the Underwriters agree that it would
not be just and equitable if contributions pursuant to this Section 6(e) were to
be determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take into account the equitable considerations referred to herein. The amount
paid or payable by an indemnified party as a result of the loss claim,
liability, expense or damage, or action in respect thereof, referred to above in
this Section 6(e) shall be deemed to include, for purposes of this Section 6(e),
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 6(e), no Underwriter shall be
required to contribute any amount in excess of the underwriting discounts
received by it and no person found guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) will be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute as provided in
this Section 6(e) are several in proportion to their respective underwriting
obligations and not joint. For purposes of this Section 6(e), any person who
controls a party to this Agreement within the meaning of the Act will have the
same rights to contribution as that party, and each officer of the Company who
signed the Registration Statement will have the same rights to contribution as
the Company, subject in each case to the provisions hereof. Any party entitled
to contribution, promptly after receipt of notice of commencement of any action
against any such party in respect of which a claim for contribution may be made
under this Section 6(e), will notify any such party or parties from whom
contribution may be sought, but the omission so to notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 6(e). No party will be liable for
contribution with respect to any action or claim settled without its written
consent (which consent will not be unreasonably withheld).
(f) The indemnity and contribution agreements contained in this Section
6 and the representations and warranties of the Company and the Selling
Stockholder contained in
28
<PAGE> 29
this Agreement shall remain operative and in full force and effect regardless of
(i) any investigation made by or on behalf of the Underwriters, (ii) acceptance
of any of the Shares and payment therefor or (iii) any termination of this
Agreement.
7. Reimbursement of Certain Expenses. In addition to its other
obligations under Section 6(a) of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon,
in whole or in part, any statement or omission or alleged statement or omission,
or any inaccuracy in the representations and warranties of the Company or the
Selling Stockholder contained herein or failure of the Company or the Selling
Stockholder to perform its or their respective obligations hereunder or under
law, all as described in Section 6(a), notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the obligations under
this Section 7 and the possibility that such payment might later be held to be
improper; provided, however, that, to the extent any such payment is ultimately
held to be improper, the persons receiving such payments shall promptly refund
them.
8. Termination. The obligations of the several Underwriters under this
Agreement may be terminated at any time on or prior to the Closing Date (or,
with respect to the Option Shares, on or prior to the Option Closing Date), by
notice to the Company from the Representatives, without liability on the part of
any Underwriter to the Company if, prior to delivery and payment for the Firm
Shares or Option Shares, as the case may be, in the sole judgment of the
Representatives, (i) trading in any of the equity securities of the Company
shall have been suspended by the Commission, (ii) trading in securities
generally on the NYSE shall have been suspended or limited or minimum or maximum
prices shall have been generally established on such exchange, or additional
material governmental restrictions, not in force on the date of this Agreement,
shall have been imposed upon trading in securities generally by such exchange,
by order of the Commission or any court or other governmental authority, or by
the NYSE, (iii) a general banking moratorium shall have been declared by Federal
or New York State authorities or (iv) any material adverse change in the
financial or securities markets in the United States or in political, financial
or economic conditions in the United States or any outbreak or material
escalation of hostilities or other calamity or crisis shall have occurred, the
effect of which is such as to make it, in the sole judgment of the
Representatives, impracticable or inadvisable to proceed with completion of the
public offering or the delivery of and payment for the Shares.
If this Agreement is terminated pursuant to Section 9 hereof, neither
the Company nor any Selling Stockholder shall be under any liability to any
Underwriter except as provided in Sections 4(j), 6 and 7 hereof; but, if for any
other reason the purchase of the Shares by the Underwriters is not consummated
or if for any reason the Company shall be unable to perform its obligations
hereunder, the Company will reimburse the several Underwriters for all
out-of-pocket expenses (including the fees, disbursements and other charges of
counsel to the Underwriters) incurred by them in connection with the offering of
the Shares.
9. Substitution of Underwriters. If any one or more of the Underwriters
shall fail or refuse to purchase any of the Firm Shares which it or they have
agreed to purchase hereunder,
29
<PAGE> 30
and the aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of Firm Shares, the other Underwriters shall be
obligated, severally, to purchase the Firm Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase, in the
proportions which the number of Firm Shares which they have respectively agreed
to purchase pursuant to Section 1 bears to the aggregate number of Firm Shares
which all such non-defaulting Underwriters have so agreed to purchase, or in
such other proportions as the Representatives may specify; provided that in no
event shall the maximum number of Firm Shares which any Underwriter has become
obligated to purchase pursuant to Section 1 be increased pursuant to this
Section 9 by more than one-ninth of such number of Firm Shares without the prior
written consent of such Underwriter. If any Underwriter or Underwriters shall
fail or refuse to purchase any Firm Shares and the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase exceeds one-tenth of the aggregate number of the Firm Shares
and arrangements satisfactory to the Representatives and the Company for the
purchase of such Firm Shares are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter and the Company for the purchase or sale of any
Shares under this Agreement. In any such case either the Representatives or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or in any other documents or
arrangements may be effected. Any action taken pursuant to this Section 9 shall
not relieve any defaulting Underwriter from liability in respect of any default
of such Underwriter under this Agreement.
10. Miscellaneous. Notice given pursuant to any of the provisions of
this Agreement shall be in writing and, unless otherwise specified, shall be
mailed or delivered (a) if to the Company, at the office of the Company, 1600
North Desert Drive, Tempe, Arizona 85281-1230, Attention: Jack L. Saltich, with
a copy to Robert S. Kant, Esq., Greenberg Traurig, P.A., One East Camelback
Road, Suite 1100, Phoenix, Arizona 85012, (b) if to the Selling Stockholder, to
David R. Buchanan c/o the Company or (c) if to the Underwriters, to the
Representatives at the offices of Needham & Company, Inc., 445 Park Avenue, New
York, New York 10022, Attention: Corporate Finance Department, with a copy to
Dennis C. Sullivan, Esq., Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue,
Palo Alto, California 94301-1825. Any such notice shall be effective only upon
receipt. Any notice hereunder may be made by telecopier or telephone, but if so
made shall be subsequently confirmed in writing.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, the Selling Stockholder, and the controlling
persons, directors and officers referred to in Section 6, and their respective
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. The term "successors and assigns" as used
in this Agreement shall not include a purchaser, as such purchaser, of Shares
from any of the several Underwriters.
Any action required or permitted to be made by the Representatives
under this Agreement may be taken by them jointly or by Needham & Company, Inc.
30
<PAGE> 31
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to contracts made and to be
performed entirely within such State.
This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
The Company and the Underwriters each hereby waive any right they may
have to a trial by jury in respect of any claim based upon or arising out of
this Agreement or the transactions contemplated hereby, provided, however, that
none of the Company or the Underwriters shall be deemed to have waived any right
they may have to a trial by jury in respect of any claim by a third party
against any such party.
31
<PAGE> 32
Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Underwriters.
Very truly yours,
THREE-FIVE SYSTEMS, INC.
By:
---------------------------------
Title:
Selling Stockholder
-----------------------------------
David Buchanan
Confirmed as of the date first
above mentioned:
NEEDHAM & COMPANY, INC.
ING Barings
J.C. Bradford & Co.
Acting on behalf of themselves
and as the Representatives of
the other several Underwriters
named in Schedule I hereto.
By: NEEDHAM & COMPANY, INC.
By:
------------------------------------
Title:
32
<PAGE> 33
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm
Shares to be
Underwriters Purchased
----------------------
<S> <C>
Needham & Company, Inc.................................................
ING Barings............................................................
J.C. Bradford & Co.....................................................
----------------------
Total................................................
======================
</TABLE>
<PAGE> 34
SCHEDULE II
FORM OF LOCK-UP AGREEMENT
July __, 1999
NEEDHAM & COMPANY, INC.
ING Barings
J.C. Bradford & Co.
As Representatives of the several Underwriters
c/o Needham & Company, Inc.
445 Park Avenue
New York, New York 10022
Ladies and Gentlemen:
The undersigned is a holder of securities of Three-Five Systems, Inc.,
a Delaware corporation (the "Company") and wishes to facilitate the public
offering of shares of the Common Stock (the "Common Stock") of the Company (the
"Offering"). The undersigned recognizes that such Offering will be of benefit to
the undersigned.
In consideration of the foregoing and in order to induce you to act as
underwriters in connection with the Offering, the undersigned hereby agrees that
he, she or it will not, without the prior written approval of Needham & Company,
Inc., acting on its own behalf and/or on behalf of other representatives of the
underwriters, directly or indirectly, sell, contract to sell, make any short
sale, pledge, or otherwise dispose of, any shares of Common Stock, options to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock of the Company which he, she or it may own,
exclusive of any shares of Common Stock purchased in connection with the
Company's public offering or purchased in the public trading market, for a
period commencing as of the day on which the registration statement to be filed
on behalf of the Company in connection with the Offering (the "Registration
Statement") shall become effective by order of the Securities and Exchange
Commission (the "Effective Date") and ending on the date which is Ninety (90)
days after the Effective Date. The undersigned confirms that he, she or it
understands that the underwriters and the Company will rely upon the
representations set forth in this Agreement in proceeding with the Offering. The
undersigned further confirms that the agreements of the undersigned are
irrevocable and shall be binding upon the undersigned's heirs, legal
representatives, successors and assigns. The undersigned agrees and consents to
the entry of stop transfer instructions with the Company's transfer agent
against the transfer of securities held by the undersigned except in compliance
with this Agreement.
<PAGE> 35
This Agreement shall be binding on the undersigned and his, her or its
respective successors, heirs, personal representatives and assigns upon the
effectiveness of the Registration Statement.
Very truly yours,
-------------------------
Print Name of Stockholder
-------------------------
Signature
The Company requests that this Lock-Up Agreement be completed and delivered to
the Company's counsel, O'Connor, Cavanagh, Anderson, Killingsworth & Beshears,
One E. Camelback Road, Suite 1100, Phoenix, AZ 85012, Attn: Brian H. Blaney
<PAGE> 36
ATTACHMENT TO SCHEDULE II
DIRECTORS, OFFICERS AND STOCKHOLDERS
OF THE COMPANY WHO SHALL SIGN LOCK-UP AGREEMENT
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Exhibit 5
[Greenberg Traurig, P.A.]
August 25, 1999
Three-Five Systems, Inc.
1600 N. Desert Drive
Tempe, AZ 85281-1230
RE: REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
As legal counsel to Three-Five Systems, Inc., a Delaware corporation
(the "Company"), and David R. Buchanan, (the "Selling Stockholder"), we have
assisted in the preparation of the Company's Registration Statement on Form S-3
filed on July 30, 1999 with the Securities and Exchange Commission (the
"Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended (the "Securities Act"), of the shares of
common stock, par value $.001 per share, of the Company covered by the
Registration Statement (the "Shares"). The facts, as we understand them, are set
forth in the Registration Statement.
With respect to the opinion set forth below, we have examined
originals, certified copies, or copies otherwise identified to our satisfaction
as being true copies, only of the following:
A. The Restated Certificate of Incorporation of the Company, as
filed with the Secretary of State of the State of Delaware on April 27, 1994;
B. The Bylaws of the Company, as amended through the date hereof;
C. The Registration Statement; and
D. The Resolutions of the Board of Directors of the Company dated
July 22, 1999 relating to the approval of the filing of the Registration
Statement and the transactions in connection therewith.
Subject to the assumptions that (i) the documents and signatures
examined by us are genuine and authentic and (ii) the persons executing the
documents examined by us have the legal capacity to execute such documents, and
subject to the further limitations and qualifications set forth below, based
solely upon our review of items A through D above, it is our opinion that, when
(a) the Registration Statement as then amended shall have been declared
effective by the Securities and Exchange Commission, (b) the Underwriting
Agreement shall have been duly executed and delivered, and (c) the Shares have
been duly issued, executed, authenticated, delivered, paid for and sold by the
Company and the Selling Shareholder as described in the
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Three-Five Systems, Inc.
August 25, 1999
Page 2
Registration Statement and in accordance with the provisions of the Underwriting
Agreement, the Shares will be validly issued, fully paid, and nonassessable.
We have assumed, with respect to the Shares that are to be sold by the
Selling Stockholder, the payment by the Selling Stockholder (or the prior
holders thereof) of the full and sufficient consideration due from them to the
Company for such Shares.
Please be advised that we are members of the State Bar of Arizona, and
our opinion is limited to the legality of matters under the laws of the State of
Arizona and the General Corporation Laws of the State of Delaware. Further, our
opinion is based solely upon existing laws, rules and regulations, and we
undertake no obligation to advise you of any changes that may be brought to our
attention after the date hereof.
We hereby expressly consent to any reference to our firm in the
Registration Statement and in any registration statement filed pursuant to Rule
462(b) under the Securities Act for this same offering, inclusion of this
Opinion as an exhibit to the Registration Statement and the incorporation by
reference into any such additional registration statement, and to the filing of
this Opinion with any other appropriate governmental agency.
Very truly yours,
/s/ Greenberg Traurig, P.A.
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EXHIBIT 23(b)
[ARTHUR ANDERSEN LLP LOGO]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
included in this registration statement and to the incorporation by reference
in this registration statement of our report dated January 22, 1999 included in
Three-Five Systems, Inc.'s Form 10-K for the year ended December 31, 1998 and
to all references to our Firm included in this registration statement.
/s/ Arthur Andersen LLP
Phoenix, Arizona,
August 25, 1999.
